- What is "cost" and "evaluation"
- Aspects of evaluation
- Approaches Used in the Assessment
- The result of the valuation
- Classification of values
- Business valuation
- Value in valuing a business
- Property valuation
- Value in real estate valuation
- Is the value constant?
Cost is one of the key characteristics of the subject of a civil transaction. What are its signs? How are values classified? What is the purpose of calculating relevant indicators in business or real estate business and by what methods?
What is "cost" and "evaluation"
Before exploring the types of value and related grounds for its classification, we will determine what it is. There are a lot of criteria among world and Russian economists that would allow it to give an unambiguous description. Among the most popular are: cost - this is a sum of money, which is set as a condition of the transaction in the process of interaction of civil law entities at the intended time of transfer of property rights or other mechanisms for using the object. In turn, the concept of "assessment" is associated with the mechanism for determining the amount in question.
Aspects of evaluation
Objects of valuation can be real estate, services, transport, household items, intellectual property - all that is provided by civil law as a possible subject for transactions involving individuals and legal entities. The procedure associated with determining the monetary value, the transfer of which from one legal entity to another is the basis for the transfer of property rights, is carried out by methods recognized by both parties. They can also be offered by third parties, but subject to agreement with the main parties to the transaction.
Those or other types of value of goods, property or services can be determined, depending on the nature of legal relations, at the request of the parties or by virtue of the requirements of the law. For example, in real estate transactions, the services of appraisers, in many cases, are necessary for registering property rights.
Approaches Used in the Assessment
Evaluation, as well as, for example, determining the type of value, can be carried out within the framework of various approaches. In Russian business practice, there are three main ones: profitable, comparative and costly. Consider their essence.
The revenue model involves the use of methods that are based on calculating the estimated revenue from the possible use by the new owner of the property being valued - for example, renting. A comparative model involves the study of figures characterizing the types of property values of some objects, with indicators of other, very similar in basic characteristics. For example, the appraiser, determining the appropriate monetary indicator for an apartment, as a rule, studies already existing offers in the real estate market. Within the framework of the cost model, the possible costs that are necessary from the point of view of maintaining the object in a proper functional state are calculated. If, say, a person buys a tractor, the valuation expert hired by him should, when determining the cost of this type of transport, take into account the potential costs associated with the repair of equipment.
The result of the valuation
Once the types of property values have been analyzed, and the corresponding estimate is given, its result can be used as a guideline for determining the final price of the transaction. Or for other purposes - for example, when concluding an insurance contract, providing a loan, selling a share, etc. Let us consider what types of value are distinguished in the evaluation of various objects by Russian experts. As well as how relevant information can be used in practice.
Classification of values
What types of value of a particular object of assessment do modern experts distinguish? There are quite a few classification criteria. Consider one of the models common among Russian economists.
It is present, in particular, the market value. This is the price, the value of which is fixed at the time of the valuation of the object, provided that it is intended to be sold in the competitive segment. That is, the mandatory conditions for determining the correct value - the availability of public information about the principles of product pricing, the absence of significant external (regulatory) factors affecting the price.
There is an investment value in this model. Its indicators are identified in order to provide information to those interested in investing in an object. In some cases, the investment value may coincide with the market. But it's not always the case. Sometimes, simultaneously with the investment, the liquidation value of the object is also calculated. Its value expresses the probable size of the possible proceeds upon the resale of the subject matter of the transaction.
There is a cadastral value. The purpose of its establishment is to enter the object in a certain state or industry register with the subsequent use of information by the relevant statements. As a rule, in this case we are talking about the calculation of taxes. Cadastral value is usually lower than the market, if we talk about real estate, or approximately equal to it.
There is also such a thing as insurance value. It involves the calculation of the value of payments under the insurance contract. In some cases, simultaneously with it is also calculated the replacement value of the object. This happens, for example, if the corresponding agreement with the insurance company implies not monetary compensation, but bringing the object to its original functional state upon the fact of damage or failure.
Thus, we considered 4 types of costs that are most common in the Russian economic school, as well as several complementary ones. This list is, of course, not exhaustive. There are private types of market value, as well as investment, or cadastral, concerning the characteristics of objects with different, as an option, legal status. We now turn to the study of the essence of objects in respect of which the corresponding parameter is calculated in the aspect of practical significance.
Of course, there are a lot of specific types of objects for which the value is determined. Among the most frequently encountered in Russian business practice is business and real estate. In the first case, the aggregate of the assets of firms, the principles of management and activities that generate profits is estimated. Before studying the types of value of the enterprise, it will be useful to determine the goals that face the subject of the corresponding assessment.
Why determine the cost parameters for the business? The first option here is the prospects for selling the company. The owner of the company may decide to do another thing, but first it is advantageous to transfer the current into the hands of another owner. Also, business valuation can be done to improve the quality of company management, to identify possible deficiencies in the management system. Another option is to attract investors' attention if there is not enough working capital, or the company has been tasked with expanding the market, as a result of which there is a need for additional funds. Business valuation can be carried out at the time of issuing a loan - it is, as a rule, that serves as a guideline for making a decision on a loan issuance by a bank.
Value in valuing a business
What types of value are used in the valuation of enterprises? What principles are most often used here? The main types of value that are applicable to business valuation are market and investment. According to some experts, considering the possibility of buying a business, it is advisable for a partner to focus on the second direction in the analysis of relevant prospects. Since the typical “market” price for business is an indicator that does not always speak of the potential for the development of an enterprise unequivocally. But if it is a question of identifying it, then the key principles for calculating the necessary numbers can be based:
- on comparison of the available indicators with those characteristic of other market participants;
- to study the competitive advantages of the business;
- on the subjective vision of the experts making the assessment;
- to study the influence of external factors.
If we are talking about determining the investment value of a business, then the same principles can be applied, but in addition to them, it is also permissible to use a number of others:
- modeling of the behavior of the subjects involved in the business (influence of factors);
- calculation of profitability (increase in market value over time).
Specific value indicators can satisfy a potential business buyer or investor, depending on what the estimated amount of investments in the business and what are the prospects for their payback. In many cases, the investment may be of credit origin. The amount of possible profit should not only be non-zero, but also ensure that interest is paid to the bank. Additional benchmarks in investor decision making, not counting indicators reflecting the market and investment value of a business, can be:
- the perceived stability of the business (the ability to generate income for a long time);
- correlation of payback periods with competitive businesses (perhaps, it is more profitable for an investor to invest in another firm, and for a buyer to acquire it);
- level of trust between partners.
These criteria can be very subjective. Therefore, in business practice, the market and investment value of a business are parameters, although important, but not always related to the number of key ones.
Another possible factor is the cost of the types of work related to evaluating a business for investment or a potential purchase. If the study of the company can be accompanied by significant investments that do not imply real profits (for example, recourse to external experts, auditors and analysts), then it is likely that the investor or potential business buyer would prefer not to deal with a particular firm.
It will be useful to study what types of property values are, as well as what approaches are being implemented in its assessment. But before - as in the case of a business - we define goals that are pursued by participants in civil law transactions of a corresponding type. The need to study the types of property values, as well as to apply for the services of an appraiser, arise in the following main cases:
- there will be a deal of sale and purchase of an apartment, office, other building or room;
- estimated assets of the company;
- determine the size of the taxable base in terms of property charges.
Of course, in practice there can be more reasons for real estate valuation. For example, in some cases it is necessary to determine the types of the estimated cost in addition to the basic procedures. Or - as an option - to evaluate the property in order to transfer it for state needs.
Value in real estate valuation
Above, we noted that the main types of enterprise value are market and investment. With respect to real estate, the same parameters can be investigated, but, as a rule, a number of some more go. Namely - the cadastral and insurance value of the object. In some cases, liquidation is also determined. We have already considered the specifics of determining the market and investment value above. In the case of real estate, the general principles and methods in their form are generally similar to those used in business valuation. Only they will be used if they are more adapted to the specifics of the relevant market: "competition" is replaced by "state" (level of repair, finishing materials and its quality, etc.), "profitability" - by the expected "rise in prices".
We now study how the calculation of figures for the cadastral, insurance and liquidation values is carried out. All of them have some specifics. Each type of determined value from the listed is characterized by features in the aspect of valuation methods. Consider them.
If we are talking about the cadastral value of real estate, the appraiser takes as a basis the methods reflected in the relevant legislative sources, recommendations of the Ministry of Finance and other departments responsible for the practical use of relevant information about housing. In some cases, criteria that are characteristic for determining the market value of an object may also be used. Various technical documentation can be studied.
If the task is to determine the insurable value of the property, then in this case, as a rule, the appraiser is guided mainly by market methods, but adjusted for the actual content of the purchase and sale transaction. For example, if a person buys an apartment on a mortgage, then only the loan amount can be included in the insurance value. And in this case, the corresponding base for calculating the amount under an agreement with the insurers may be lower than if the market value of the apartment was taken as a basis in pure form.
Mortgage is an example of a market segment where the liquidation value of an object can be practically significant for the subjects of civil law transactions. If, for example, an individual or an organization fails to fulfill the terms of a loan payment, the bank is likely to decide on the sale of the property in pledge. Even before the signing of the loan transaction, the financial institution will probably wish to analyze the prospects of the liquidation component of the project.
Note, however, that some experts consider it illegal to use the term "residual value" in relation to real estate transactions when interacting with banks. The fact is that by default the mortgage agreement does not imply the mandatory transfer of the apartment to the ownership of the bank - it is only an interim measure on the loan. While in its pure form, the liquidation value implies the calculation of the price at which the owner of the object (for example, a business) will be able to sell his property (for example, due to the bankruptcy of the enterprise). Therefore, to use the term in question, in relation to real estate, should be cautious.
Is the value constant?
Many modern economists believe not. If, of course, we are talking about a market economy, where there is a place for the mechanism of free price formation, based on supply and demand. Regardless of what types of value of the goods are investigated, each of them is a non-constant value, an approximate guideline that can be used by the parties to the transaction at a particular point in time. There are, of course, industries where the volatility of the relevant indicators is minimal - for example, market segments dominated by government orders. But it is rather an exception. The ability to navigate in a changing value environment is one of the most important competitive advantages of any modern business.