The value of a company is determined by the economic consideration expected by the buyer. From his perspective, the seller is interested in obtaining the highest possible price, with the upper limit ultimately determined by market prices if there are transactions with similar characteristics. The question is what happens when there are no comparable transactions at the individual level to compare, and when the seller identifies unique characteristics of the business being sold. This is where business valuers come to the aid of the seller and the buyer. They explain, in an informed manner, why a certain price is reasonable for them, and another is not. Despite this, in the context of negotiations, the commercial part is of great importance and also includes emotional characteristics.
For example, let's assume the seller believes his business has greater potential than competitors and therefore requests a higher price. The valuer will examine the basis for this belief and inform the parties whether there is any truth to it or not.
Accounting valuation deals with the asset value according to the balance sheet as of a certain date, but in a dynamic and active business, current and future business results are of great importance. Business results can be current or future, and the valuer's role is to determine how goals and objectives can be achieved in ways that enable the buyer to improve business results. There is no single formula here, and the more skilled the valuer, the more likely he is to determine the appropriate route for the buyer, so that the seller can realise his desire to charge a higher price.
Our company specialises in valuations, both in the accounting-asset field and in finding the right route to realise business potential, so that sellers can feel confident that if the price they demanded is higher than market prices, they can achieve it with greater certainty. On the other hand, buyers will receive genuine, fair service that enables them to purchase the business at an appropriate price and achieve the desired return on their personal capital.
Company valuation is usually done at times such as: selling the business, raising investors, raising capital from financial institutions, prospectuses for the stock exchange and allocating shares to shareholders.
Valuation is carried out according to certain rules based on existing balance sheets and cash flows from previous periods, and is expected to be based on the balance sheet and a forecast/business plan, according to the assumptions of the plan's editor.
Company valuation is a professional matter for an accountant or economic consultant/financial advisor and concerns all investors without specific reference to a particular investor with unique characteristics.
Valuation is usually done using discounted cash flow (DCF)/or the asset method (assets minus liabilities)/or according to the weighted cost of capital model, and/or the Cowley model. When the company's assets are mainly inventory that can be sold or generated income from Current assets, such as a real estate company, the method of calculating the value is according to the accepted asset method and discounting cash flows of sales and projects, with the price of capital to be determined according to the weighted cost of capital and/or the Cowley model.
Since the value of a company or business is determined as of a specific date, audited balance sheets must be prepared as of that date. These balance sheets show financial ratios, accumulated capital, periodic profit and loss from the beginning of the period to the balance sheet date, trend analysis of previous years, and the calculation of the company's cost of capital based on balance sheet data.
Balance sheet effects generally refer to the expected cash flow forecast according to the balance sheet in future periods. The current ratio on the balance sheet indicates what the business owes and what it is owed, including current maturities, fixed payments, etc. In other words, the contribution of the balance sheet to future cash flow. In the event that the assets on the balance sheet are carried at costs that are not up to date, adjustments must be made to the economic value, with the difference credited to financing income (in a separate section).
In addition to the balance sheet impact flow, it is required to calculate future cash flow arising from business activity. That is, expected revenues minus expected expenses in future periods (without balance sheet independence), in addition to the balance sheet charges.
For each company or business, a period is accepted for which these forecasts are calculated, since a relatively high cost of capital reduces the expected present value in future years. The reason stems from the review horizon or the period after which we expect a return on investment.
In businesses with high barriers to entry, investors expect their investment to yield returns that are not high but stable over time (relatively low risk level) while in businesses with low barriers to entry and high competition, with a relatively high risk level, investors expect short-term returns and investment returns, and therefore the testing horizon is shorter (high risk level). In any case, each case is unique, and the testing horizon varies across industries depending on business characteristics and risk level.
That is, the value will decrease by the investors' risk-adjusted rate of return and the price of money over a 10-year period. The calculation reduces the amount that investors will pay in the present as a function of the reduction in profits during the period of measurement of the value over a period of time of about 10 years or more, and by adding a long-term present value from the end of the measurement period and discounting it to the existing current value.
Calculate the present value of the cash flow forecast. The valuation period is the time during which a detailed cash flow forecast is prepared, including the effects of the balance sheet and business forecasts. In addition, the present value of the cash flows is calculated indefinitely according to the formula of the cash flow divided by the discount rate as an additional value in addition to calculating the cash flows during the measurement period. The value - the current values of the cash flows as of a given date or the date of the last balance sheet.
In the hotel sector, the hotel structure itself has value and, in some cases, is presented as sold (Gart value) at the end of the measurement period, so its current value is not high relative to its present value. Expected movements in inventory are recorded as balance sheet effects (an increase or decrease in its value on the balance sheet), while equipment, unlike profit and loss, does not take into account depreciation, but rather the expense of its renewal or maintenance, as well as the assessment of the value of the asset according to price trends.
Financing expenses will also not be recorded in the business forecast since they are a function of the financing of the investors themselves. The calculation is for all investors, including financing entities, including banks and institutional entities, whose cost of capital is weighted in relation to their share in the investment, unless we calculate the value of the company for a specific investor with a given cost of capital for him, when from his perspective the financing costs of external entities are not related to his expected income but to financing expenses that are part of the business forecast. It is recommended to prepare a company valuation through a business/economic consultant specialising in a specific field or industry and/or accountants with financial departments other than the audit department.
The discount interest rate is the weighted interest rate of all financing entities, including banks, government ministries (grants and loans), private investors, shareholders, etc. In other words, each investor has their share of the total balance sheet, so their share of the cost of capital will be recorded proportionally, and the discount interest rate will be determined accordingly.
In the case of new investments, there will be a difference between the balance sheet cost of capital and the cost of capital of the business forecast since the ratio of each investor's capital may change.
Generally, investors determine the discount rate based on accepted returns in the capital market. For institutional investors, we will estimate the discount rates based on their average loan interest rate, banks in the same way, and government institutions according to the level of risk resulting from cessation of activity. The methods are diverse and must be appropriate for the investing entities or for all investors in the venture and/or company.
Since the cost of capital is weighted for all investors, no test is suitable for an individual investor with different characteristics. Let's assume that the cost of capital for a private investor is 20%, and therefore, if the value is based on a weighted interest rate of only 10%, that private investor will have to examine the amount he would be willing to pay for the company and will probably want to pay less or reduce the exposure to risk of his entire investment portfolio.
The valuation of a company is a complex matter, requiring the calculation of differential capital prices and the analysis of the risk level of the financial variables. In any case, valuation is a matter for experts in the field, and the methods must be adapted to business, financial, quantitative, and market characteristics.
