Corporate rights valuation is the definition of the market value of the enterprise. Usually the appraiser is asked to determine the share in the business belonging to one of the founders (for LLC) or shareholders (for JSC).
Corporate rights valuation of a Limited Liability Company is most often required for:
- Sales by one of the founders of its share in the authorized capital.
- Processing of documents for filing a claim in litigation between co-owners of business.
In case when it is necessary to evaluate a part of a joint-stock company, the most common cases are additional issue or redemption of shares from minority shareholders. If you are interested in determining the value of the stock, please refer to our article «Valuation of shares». Here we are talking mainly about the peculiarities of determining the cost of shares in LLC.
Of course, the first three questions of almost all those interested in the services of appraisers are:
- How much does the corporate rights valuation cost?
- What documents should be provided to the appraiser?
- How long will it take to complete all the calculations and their registration?
Unfortunately, in the case of corporate rights, there is no one-size-fits-all answer for all enterprises. It all depends on the characteristics of the particular business, as well as on the purpose of the evaluation.
Below we provide detailed answers to these three most frequently asked questions.
1. How much does the corporate rights valuation cost?
In general it is impossible to answer this question «on the spot». This is due to the fact that before the appraiser gets an idea of the enterprise being evaluated, he will not understand the volume and complexity of its valuation.
It is clear that enterprises can be completely different: from small business with an office table and a computer to huge agricultural holdings with real estate, transport and production equipment on the balance sheet. Accordingly, approaches to valuation of corporate rights will vary.
Two main factors influence the choice of approach to business cost calculations and, accordingly, the amount of work for the appraiser:
- Does the company have a stable profit for 2-3 years.
- Which non-current assets are listed on the balance sheet?
If a business does not make a stable profit, valuation of corporate rights is most often seen as the difference between the value of an enterprise’s assets and its liabilities. However, it should be understood that this is not about the book value of such assets as fixed assets, but about their market value, which defines the appraiser.
The book value of many fixed assets, even real estate, cars or equipment, may be even zero, but does not mean that these assets are really worthless. During the calculation of the enterprise value, the appraiser separately determines the market value of each asset in the balance sheet.
If the enterprise is consistently profitable and there are reasonable prospects for maintaining such profitability in the future, other approaches to the evaluation of its corporate rights are used. Appraisers analyze the financial results of economic activity in the context of income and expenses, make a development forecast or business plan and financial model. After that, the corporate rights of the profitable enterprise are evaluated through its future profitability. This is a rather complicated job, requiring a highly qualified appraiser.
The characteristic misconception of many customers who turn to appraisers of corporate rights is the exaggerated importance of such a factor as authorized capital.
The size of the authorised capital does not affect either the value of the enterprise or the price of the appraiser’s services.
The authorized capital in one or another amount is just a historical fact. At one time the founders have invested in the organization of business certain sums. After that, the business could develop and its cost became much higher than the authorized capital. Or vice versa, the business «did not go», there is no profit and liabilities exceed assets, and the price of such an enterprise is close to zero.
2. What documents should be provided to the appraiser?
It is apparent from the previous information that:
- Each enterprise is unique by its own way, so the approach to its valuation can only be individual.
- Depending on the characteristics and financial performance of the business the appraiser uses different methods of calculation.
The list of documents required for the valuation of corporate rights is formed in two stages. First, we will ask for annual balances and financial results for the past 2-3 years. As well as the last balance submitted to the Statistical Office if LLC submits quarterly reports.
The analysis of these documents gives a preliminary overview of the characteristics of the enterprise and its main indicators. Depending on the balance sheet structure, appraisers will be asked to provide decryptions of some rows (most often the principal, including low-value, non-current tangible assets). If the enterprise is profitable, additional information will also be required on the indicators in the financial performance report.
Only after receiving all these documents can corporate rights appraisers understand the scope of the work and the timing of its execution in this particular case. And, of course, we will try to make the most advantageous in comparison with competitors commercial offer.
3. How long will it take to complete all the calculations and their registration?
It is clear that the duration of any work depends on its volume. Just like the price of services. After analyzing the above mentioned documents, we go to the customer with a commercial offer, where we specify the exact price of our services and the term of work.
Valuating the corporate rights of a small enterprise that has no stable profit and few assets on the balance sheet can take just a couple of working days. At the same time, appraisers can «tinker» with large enterprises and several weeks. For most companies we usually fit in one week, but once again emphasize that each business is unique. Therefore, depending on the complexity and scope of the work and the price of the services, and the duration of the assessment of corporate rights are determined individually.
At the same time, at the stage of providing documents, the appraiser will be able to give comments on how the cost of business will be calculated, what approaches and methods will be used. And also to advise on all issues of valuation of corporate rights and even to «estimate», on what indicative cost of the enterprise can be reached.
The terms of each individual work on valuation of corporate rights are discussed individually, depending on the specifics of the activity, the availability of access to the enterprise’s accounts and the purpose of the valuation. In order to determine the complexity of the work, and therefore its cost and term of execution, we need a balance sheet of the enterprise and a report on its financial results for the last accounting period. Depending on the information reported, we will need to decrypt some lines of balance. It is not possible to tell in advance what decipherments are needed, it will be clear after studying the balance. Only then can we meaningfully negotiate this type of valuation.
There is no average cost of business valuation, nor is there a “average” cost of doing enterpises valuation. In most cases, when making an assessment, it is necessary to re-evaluate everything on the balance sheet, and as assets, there and debts of the firm. Each enterprise is unique and is characterized by a large number of factors that affect its cost. Therefore, the cost of the valuation is calculated on a case-by-case basis.
Valuation of corporate rights (or the same thing – valuation of an enterprise) is one of the areas of expert valuation and is usually conducted for the following purposes:
Our company carries out valuation of enterprises on the basis of the certificate of the subject of valuation activities with open direction «Evaluation of integral property complexes, units, securities, property rights and intangible assets issued by the State Property Fund of Ukraine.
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