Cost-based approach to business valuation: description, essence and examples

In practice, each company's work is analyzed. . At the same time, a profitable, costly, comparative approach to business valuation can be applied. The need for analysis arises in a variety of situations. . Let us consider further how the business valuation is carried out using the cost-based approach .

General information

In international practice, experts use three approaches to evaluation:

• Costly;
• Comparative;
• Profitable.

The analysis of domestic organizations is regulated by sectoral Federal Law, as well as federal standards (FSO). Each approach provides for its own assessment methods.

Characteristics

The comparative approach includes three methods. In particular, the capital market, industry coefficients and transactions are analyzed. The income approach is based on 2 options. They are the analysis of capitalization and discounted financial flows. The cost approach is also based on two methods: the net asset method and the residual value. They are used almost in all transformations of the organization. The analysis is carried out with the acquisition or sale of production, corporatization of the firm, acquisition, merger and so on.

Cost-based approach to the valuation of the enterprise (business)

This version of the analysis has one key feature that distinguishes it among others. является поэлементной. Business valuation using the cost-based approach is element-wise. In the analysis of the property complex is divided into certain components. Each element received is examined, its price is revealed. In the end all the received indicators are summarized, and the total cost of the enterprise is displayed.

Key areas

объединяет в себе: Cost-based approach to assessing the value of business combines:

1. Investigation of the accumulation of assets of the organization.
2. Adjusted cost by balance or net assets method.
3. Determination of the liquidation price.
4. Method of substitution.

These options are combined according to one essential feature. They are based on determining the value of each particular type of organization's property at current prices or the cost of creating a similar company (by the method of substitution) and subtracting the sum of all the firm's debts. At the analysis the uniform information base - balance is used.

Appointment

, как правило, используется для получения информации, необходимой для принятия разных управленческих решений. A cost-based approach to business valuation is usually used to obtain the information needed to make different managerial decisions. This is the essence of this analysis. It can be explained how the valuation of a business is carried out in a cost-effective way by the example of a company that is sold, insured or liquidated. So, at sale of firm the market price is calculated by a way of accumulation of actives. With insurance, the replacement cost is most often determined . When closing an enterprise, the liquidation price is calculated.

Benefits

A cost-based approach to evaluating a business has several advantages. The main ones are:

1. The possibility of accounting for the impact of economic or production factors on price fluctuations.
2. Use of a large information base. базируется и на учетных, и на финансовых документах. The cost-based approach to business valuation is based on both accounting and financial documents. This, in turn, allows us to obtain more substantiated results.
3. The possibility of analyzing the degree of development of the company's technology, taking into account the level of depreciation of real estate or equipment.

The disadvantages of the cost approach in assessing the business

Meanwhile, along with the benefits, there are several negative points in the analysis. . A specialist, taking them into account, can refuse to use a costly approach to assessing the business . The most significant negative aspects of the method include:

1. Definition of only the past price.
2. Impossibility to take into account the current market situation at the time of the analysis.
3. Static.
4. Impossibility to take into account risks and prospects of the company development.
5. Absence of a connection between the current and forthcoming results of the work of a specific company.

также его сложность и трудоемкость. The disadvantage of the costly approach in assessing the business is also its complexity and laboriousness.

Net book value

. The method of determining it is considered the simplest of all, included in the cost-based approach to business valuation . To establish the net book price, all liabilities (short- or long-term) are deducted from the currency value. As a result, the value of the company's own capital or its assets in monetary terms is obtained. The advantages of this method include:

1. The use of reliable information only about the actual assets that are owned by the company. This method excludes abstractness, which is inherent in other ways.
2. In market conditions, the method has the most complete database.

In this case, the method has several negative features:

1. It is impossible to take into account the effectiveness of the firm's activities and the prospects for its development.
2. The situation in the market in terms of the ratio of supply and demand to similar companies is not taken into account.

Let's consider how the business valuation is carried out by the cost-based approach in the example. The initial balance sheet data is as follows (in cu):

• OS - 5000;
• Reserves - 1000;
• Accounts receivable - 1 thousand;
• Cash - 500;
• Promissory notes - 6 thousand.

In accordance with the conclusion drawn up by the specialist, the company's fixed assets are 30% more expensive, while stocks of raw materials and materials are 10% cheaper. Accordingly, 20% of accounts receivable will not be collected. Using the appropriate coefficients, determine the book value:

1000 x 0.8 + 1000 x 0.9 + 5000 x 1.3 + 500 - 6000 = 2700.

Liquidation Price

It is determined only if the company, after stopping operations, begins to sell its assets, pay off the obligations. Calculation of liquidation value allows you to get the lowest indicator in the price level. It reflects the minimum amount by which you can sell the company.

The method of the adjusted balance price

It is considered one of the varieties of the cost approach. This method includes the final indicator of the revision of the balance sheet with the adjustment of the residual value of assets taking into account the inflation factor. In the analysis, revaluation of funds is carried out. At the same time, the result is added to the balance sheet. This allows us to determine the adjusted, net price, which, in its essence, acts as an indicator of the company's own capital and the reserve for its revaluation.

Method of substitution

It focuses exclusively on the analysis of tangible assets and operates only for capital-intensive companies. Evaluation involves calculating the cost of a full replacement of the enterprise's funds while maintaining the current economic profile. The analysis is carried out in a certain sequence. First, accounting and statistical documents are subject to evaluation. They include:

1. Quarterly reports.
2. Interim liquidation balance sheet.
3. Statistical reporting.
4. Inventory cards.

Based on the results of this comprehensive study, an idea is formed about the insufficiency or sufficiency of assets to pay off debts. After this, a property mass for evaluation is created. Separately studied are the most / minimally negotiable or liquid assets. Then the aggregate amount of the firm's debt is formed and a calendar schedule of repayment is drawn up.

conclusions

The cost-based approach, based on the analysis of the company's balance sheet, allows us to obtain fairly objective indicators. According to some experts, it is the most reliable option in today's volatile economic conditions. The essence of the assessment is the most accurate calculation of the market value of the enterprise. All its assets, including tangible, intangible and financial, are analyzed.

The book value of these funds is influenced by market changes and inflation. Accordingly, it does not always coincide with the market price. This, in turn, causes the need to adjust the balance. It is for this purpose that each asset is assessed separately.

After determining the current price of all obligations of the firm, it is deducted from a justified market indicator for all property. The result obtained and will be the price that is determined by the cost approach. Calculation of the liquidation indicator is used in the analysis of bankrupt companies or in the event of alleged loss of solvency in the short term. This price shows the amount of remaining funds after the company's implementation, repayment of direct costs and other costs.

Nuances

It should be noted that when performing an assessment of immovable property of an enterprise, specialists should have at their disposal:

1. Construction and technical characteristics for each structure. It is formed in accordance with the data of the technical passport, which, in turn, is issued in the BTI. In addition, the information should be attached to the characteristics of the capital construction department.
2. Reference information. The information should also be included in the funds that are required for repairs, and on the costs associated with the restoration.

It is also worth noting that the company's value, determined using the liquidation price method, never corresponds to the real amounts. Here it is necessary to refer to paragraph 9 of the FSO. It says that the liquidation value of the object reflects the likely amount by which it can be realized during the exposure period.