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Business valuation by income method

Market valuation of the business largely depends on what are its prospects. When determining the market value of the business is taken into account only that portion of capital which can generate income in one form or another in the future. It is very important, at what stage the business owner begins to receive revenues, and with what risks this business involves.

Determining the value of business by income method is based on the assumption that a potential investor does not pay for this business an amount greater than the value of its net assets plus income generated by the business for some time. The owner (in the normal situation) will not sell his business at a price below net asset value plus a profit, which he is guaranteed to earn over a certain time.

The interaction between the parties strike for agree on a market price equal to the net assets+ future income.

This evaluation method is intuitive for both the owner and the investor, as based onactual cash flows with the cost of financing, with reference to indicators of investment projects being implemented.

Application of this method is most justified to evaluate companies with a history of economic activity (preferably profitable) and those on the stage of growth and stable economic development. This method is less applicable to the evaluation of companies in distress, systematic losses (although the negative value of the business value may be a fact to make managerial decisions).

While assessing sometimes is used discounted cash flow method, and the fact-forecast data on the cost of bank financing, a funding currency (hryvnia - U.S.), sampling schedule and repayment of borrowed resources, replaced by a discount rate (a few coarse accuracy of calculations).

MILESTONES OF THE ENTERPRISE EVALUATION.

1. Negotiating with property owners and determine the assessment goals.

2. Analysis of financial statements.

3. Construction of an electronic model of the enterprise current activities *

4. Analysis of the current cost of product types and the forecast expenditure in relation to the production plan.

5. Forecast gross income from the sale (in conjunction with the sales plan).

6. Analysis and forecast of investment (time and money).

7. Market research to assess the competitive environment.

8. Construction of an electronic financial model for each new business considering the cost of funding.

9. Working out of the enterprise development model in the light of ongoing activities and new businesses, purchase of new equipment.

10. Scheduling obtaining financing gap and return it.

11. Multivariate calculation of payback period and generated net income (taking into account possible changes in the rates, production volumes, prices and costs, other relevant information)

12. Determining of the enterprise value, taking into account future cash flows.

13. Transfer to owner assessment model (in fact the financial accounting system)
      and training for company personnel to use it.

* provides for the automatic processing of data bases 1C or other accounting products with the required details on the depth of the period and the number of items of income and expenditure. 

Copyright@2001 Vladimir Kudashev    13.01.2011