An owner usually wants to hear a single number. But "how much is the company worth" is a question without context: worth to whom, and for what. For an outright sale, for a partner buying in, for a divorce, for security over the shares — the calculations will be different.
The income approach
The logic: a business is worth as much money as it will bring its owner in the future, brought back to today's value.
It is calculated either by capitalising sustainable profit or by discounting cash flow over a forecast period.
What drives the result is the stability of the flow, not its size. A company earning twenty million from one contract is worth less than a company earning twelve million from forty clients.
The main trap is the discount rate. Moving it by two points changes the valuation by tens of per cent, and justifying the rate is harder than justifying the revenue forecast.
This is the primary approach for an operating business with a track record.
The market approach
The logic: it is worth what similar businesses sell for.
You take multiples from transactions involving comparable companies: to revenue, to earnings before interest, tax, depreciation and amortisation, to the number of clients, or to some other sector-specific metric.
The problem with the Russian market is that deals are not disclosed. There is little public data, and sector benchmarks differ several times over. So the approach works as a sanity check on the order of magnitude, not as the main calculation.
A practical benchmark: for small businesses with revenue of up to a few hundred million, deals usually go through in a range of three to five years' profit, and any figure above that requires an explanation of exactly what the buyer is getting over and above the cash flow.
The asset approach
The logic: it is worth what it would cost to build the same thing again.
You calculate net assets: property at market value less liabilities.
This gives you the floor. For manufacturing with real estate and equipment it is a substantial floor. For consulting and services, where the main asset is people and reputation, it is close to zero.
This is precisely the approach used to calculate the actual value of a shareholding when a participant exits a company, and precisely why that value so often falls short of expectations.
Why the figures do not match
Because they answer different questions: how much money it will bring in, how much other people would pay, and how much the property is worth.
If the spread between the approaches is small, the valuation is robust. If the income approach gives you three times what the asset approach gives, the value rests on the cash flow, and the buyer will be testing how sustainable that flow is. If it is the other way round, the business is worth less than its assets, and that is a signal that the operating activity is destroying value.
What makes the figure negotiable
A valuation is a position, not a verdict. What works in negotiations is not the approaches but the factors that make a buyer cut the price:
dependence on the owner; concentration of revenue in a handful of clients; the absence of properly documented rights to key assets — trade mark, website, software; informal arrangements with staff; premises with no proper paperwork; tax exposure from earlier periods; the absence of management accounts anyone can believe.
Each of these is a discount, and each of them can be dealt with in advance. A year of preparation usually costs less than the reduction you would otherwise have to give.
Which figure do you need
For sale negotiations — the income approach, cross-checked against the market approach, with an honest list of risks.
For an investor buying in — a valuation that reflects the plans and the dilution of the shareholdings.
For a divorce or an inheritance — the market value of the share, and here you will need a valuer's report for the court.
For security over the shares — whatever the bank will accept, which is usually closer to the asset approach.
A caveat
Advice on the value of a business is not valuation activity under Federal Law No. 135-FZ and is not documented in a valuation report. If you need a report for a court, a bank or a notary, it is prepared by a valuer holding a qualification certificate — and that is a different job.
I set out how pricing works in my first reply, before any work begins.
I provide legal services through the company Kovalev & Partners LLC — kovalev.moscow.
