Stock valuation is one of the directions of independent valuation of securities. It can be considered, with some vagueness, a special case of valuation of corporate rights.
What is the purpose of stock valuation
In valuation practice we see quite a lot of situations in which it is necessary to determine the value of securities. However, in the vast majority of cases, the valuation of shares is for the following purposes:
- Additional emission (to increase in the authorized capital). In this case, the enterprise is evaluated in its entirety with an indication of the value of 100% of the capital and one share in the majority interest. The work is quite complex, since the working enterprise is generally not considered only as a set of assets and liabilities. But also as an active business generating certain profits (or losses). Since in most cases it is the income approach used to evaluate large enterprises, the securities appraiser has to have sufficiently high qualifications and extensive experience. Otherwise, he will obviously not be able to properly analyze the financial performance of the company and correctly make a forecast or business plan for several future years.
- Squeeze out. Buyback of minority interest from shareholders. The valuation process is in most cases quite different from the valuation of the shares for the additional issue. The main difference is that the same share has a completely different value depending on the package of what size it is sold. It is clear that the value of a single security in a majority-holding package giving control over the enterprise will be higher than the value of the same share in the package, for example, less than 5%.
- Valuation of third-party stocks, which are on the balance sheet of the enterprise-customer. Such work is usually carried out for accounting and tax purposes. The complexity of the work is that often the enterprise-owner of stocks and the work customer does not have full access to the accounting of the company-issuer. Therefore, the evaluator may have a limited amount of raw data, which entails a number of limitations in the use of the report. Such limitations in the use of value conclusions must be specified in the relevant section of the appraiser’s report.
- For presentation in court. Unfortunately, there are too many instances of poor-quality stocks valuations. And both intentionally and due to lack of experience of the appraiser. Of course, the other party in such cases feels aggrieved and sues. After that, there is a review (report validation). And after that, most often a second evaluation or examination. In all our articles we emphasize that the customer should pay close attention to the selection of the appraisal company. This is particularly the case when valuing securities. Often «the specialists» take on the execution of works that do not know how to do correctly and qualitatively. And as a result, everyone suffers: both the customer and the appraiser, who has to return the money for poorly done work. And in addition, and with a high probability to lose permits to engage in professional activity.
How much does the stock valuation cost («at least order of figures»)
Amount of work on stocks valuation, which means its cost and timing depends on a number of factors. As mentioned above, the definition of the value of securities in a majority package is, as the saying goes, “something” and in a minority “something else”. With the same service name, the procedure and complexity of the work can vary dramatically.
In particular, in the first stage, only to understand the volume and complexity of the work it is necessary to analyze, at a minimum:
- Enterprise asset structure.
- Fixed assets list.
- Number and status of specialized and surplus property on balance.
- Presence of complex intangible assets such as trademarks or invention rights.
- Financial investments. Often one enterprise owns shares in other companies. And, therefore, in determining the value of shares of one issuer in fact, it is necessary to conduct an evaluation of several related firms.
- Quality and recoverability of accounts receivable and accounts payable. The apparent simplicity of the valuation of receivables and liabilities often leads to very ambiguous situations. For example, the presence on the balance sheet of bills of third companies. And, as you know, to determine the value of the bill requires access to the accounting documents of its issuer. As with long-term investments, we get additional work in the form of financial analysis of another company.
- Indicators of profitability or unprofitability of the enterprise for the last few years. As well as other indicators from the financial results report, which will allow to build a forecast of business development.
- Are the securities being quoted on the stock market.
- Whether dividends were paid.
- Is there information on actual sales of shares of companies with similar activities. However, the search for and adequate selection of financial and business-like indicators is itself a separate, rather complex and controversial issue.
As you can see, the factors that affect the complexity and volume of the appraiser’s work, quite a lot. Only the receipt of information on the above mentioned requests gives the opportunity to decide how the evaluation procedure will be carried out. Approaches to determining the cost are selected based on the specific situation and performance of the enterprise. Therefore, without at least initial information about the financial performance of the enterprise, we arrive at the following conclusion. It is not possible to specify the estimated cost of the stock valuation, – it is determined only individually. And this seems obvious, because all subjects of economic activity are unique.
How to start a work
Based on the above, the request for documents to determine the complexity, timing and cost of the work takes place in two stages.
- The basic information (raw data) for the stock valuation, as in the case of corporate rights, is contained in the balance sheet of the enterprise. In the first phase of the negotiations, we need to see this balance and the financial results for the last reporting period.
- After that we will ask you to decrypt some lines of balance (depending on the balance sheet structure of the particular enterprise). In parallel with the request of documents we will see what information on the analyzed company is in the public domain. In particular, whether its shares are quoted on the stock market, whether it has sold shares in similar companies and so on.
Only after receiving this information will we be able to discuss the timing, cost and other terms of cooperation.
Our company regularly holds stock valuation in full compliance with the requirements of the National Securities and Stock Market Commission. Professional services are provided on the basis of the certificate of the subject of valuation activities with the open direction «Evaluation of integral property complexes, units, securities, property rights and intangible assets». Permit document issued by the State Property Fund of Ukraine.
We look forward to cooperate with you. You are welcome to call us!
