Types of value in valuation activities

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:46

Cost is one of the key characteristics of the subject of a civil law transaction. What are its signs? How are values classified? For what purpose in business or in the real estate business are the relevant indicators calculated and by what methods?

What is "cost" and "estimation"

Before examining the types of value and the accompanying reasons for its classification, let's define what it is. There are quite a lot of criteria that would make it possible to give it an unambiguous characteristic among world and Russian economists. Among the most popular is this: cost is a sum of money that is established as a condition of a transaction in the process of interaction of subjects of civil law relations at the expected moment of transfer of property rights or other mechanisms for using an object. In turn, the concept of "assessment" is associated with the mechanism for determining the amount in question.

Evaluation aspects

Evaluation objects can be real estate, services, transport, household items, intellectual property - everything that is provided for by civil law as a possible subject for transactions involving individuals and legal entities. The procedure for determining the monetary value,the transfer of which from one subject of legal relations to another is the basis for the transfer of property rights, is carried out by means of methods recognized by both parties. They can also be offered by third parties, but subject to agreement with the main participants in 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 legal requirements. So, for example, in real estate transactions, the use of appraisers is in many cases mandatory for registration of ownership.

Evaluation approaches

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.

Income model involves the use of methods that are based on the calculation of the estimated revenue from the possible use of the new owner of the object of assessment - for example, renting. The comparative model involves the study of figures characterizing the types of property value of some objects, with indicators of others that are very similar in basic terms. For example, an appraiser, when determining the appropriate monetary indicator for an apartment, as a rule, studies the existing offers on the real estate market. Within the framework of the cost model, possible expenses are calculated that are necessary in terms of maintaining the object in proper functional condition. If a,Let's say a person buys a tractor, then the appraiser he hires must take into account the potential costs associated with repairing the equipment when determining the cost of this type of transport.

Value estimate result

Once the types of property values have been analyzed and an appropriate valuation has been given, the result can be used as a guide to determine 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's consider what types of value are distinguished in the assessment of various objects by Russian experts. And also how relevant information can be used in practice.

Value Classification

What types of value of a particular object of assessment are distinguished by modern experts? There are a lot of classification criteria here. Let's consider one of the models common among Russian economists.

It contains, in particular, the market value. This is the price, the value of which is fixed at the time of valuation of the object, provided that it is supposed to be sold in a competitive segment. That is, the prerequisites for determining the correct cost are the availability of public information on the principles of product pricing, the absence of significant external (regulatory) factors affecting the price.

There is an investment value in the considered model. Its indicators are identified in order to provide information to persons interested in investing in a certain object. In some casesthe investment value may match the market value. But it is not always the case. Sometimes, simultaneously with the investment value, the liquidation value of the object is also calculated. Its value expresses the probable amount of possible proceeds upon resale of the subject of the transaction.

There is a cadastral value. The purpose of its establishment is the entry of an object into 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. The cadastral value is usually below market value when it comes to real estate, or approximately equal to it.

There is also such a thing as insurance value. It involves the calculation of the amount of payments under the insurance contract. In some cases, the replacement cost of the object is also calculated simultaneously with it. This happens, for example, if the relevant agreement with the insurance company implies not monetary compensation, but bringing the object to its original functional state in the event of damage or failure.

Thus, we have considered 4 types of value that are most common in the Russian school of economics, 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, relating to the characteristics of objects with different, as an option, legal status. Now let's move on to studying the essence of objects in relation to which the corresponding parameter is calculated inaspect of practical significance.

Business Valuation

Of course, there are a lot of specific types of objects in relation to which the value is determined. Among the most frequently encountered in Russian business practice are business and real estate. In the first case, the total assets of firms, management principles and activities that generate profit are evaluated. Before studying the types of enterprise value, it will be useful to determine the goals that the subject of the corresponding assessment faces.

Why value business? The first option here is the prospects for the sale of the enterprise. The owner of the company may decide to take up another business, but first it is beneficial to transfer the current one into the hands of another owner. Also, a business assessment can be carried out to improve the quality of company management, to identify possible shortcomings in the management system. Another option is to attract the attention of investors in case there is not enough working capital, or the company has set the task of expanding the market, as a result of which there is a need for additional funds. Business valuation can be carried out when applying for a loan - it is she who, as a rule, serves as a guideline for making a decision on issuing a loan by a bank.

Business Valuation Values

What types of value are involved in the valuation of enterprises? What principles are most often used here? The main types of value that are applicable in relation to business valuation are market and investment. According to some experts, considering the possibility of buying an enterprise,it is expedient for the partner to focus on the second direction in the analysis of the relevant prospects. Since a typical "market" price for a business is an indicator that does not always speak unambiguously about the development potential of an enterprise. But if we are talking about identifying it, then the key principles for calculating the necessary numbers can be based on:

- on comparison of available indicators with those typical for other market participants;

- on studying the competitive advantages of business;

- on the subjective vision of the experts making the assessment;

- on studying the influence of external factors.

When it comes to determining the investment value of a business, the same principles can apply, but in addition to them, it is also permissible to use a number of others:

- modeling the behavior of subjects involved in business (influence of factors);

- calculation of profitability (increase in market value over time).

Specific cost indicators may satisfy a potential business buyer or investor, depending on what the estimated size of the investment in the business and what are the prospects for their payback. In many cases, investments may be of credit origin. The value of the possible profit should not only be different from zero, but also ensure the payment of interest to the bank. Additional guidelines in investor decision-making, apart from indicators reflecting the market and investment value of the business, can be:

- the expected sustainability of the business (the ability togenerate income over time);

- correlation of payback periods with competitive businesses (perhaps it is more profitable for an investor to invest in another company, and for a buyer - to acquire it);

- level of trust between partners.

The above criteria can be quite subjective. Therefore, in business practice, the market and investment value of a business are parameters, although important, but not always among the key ones.

Another possible factor is the cost of the types of work associated with the evaluation of a business for investment or a possible purchase. If the study of the enterprise can be accompanied by significant investments that do not imply real profit (for example, contacting external experts, auditors and analysts), then it is likely that the investor or potential buyer of the business will prefer not to deal with a particular firm.

Real Estate Appraisal

It will be useful to study what types of real estate value are, as well as what approaches are being implemented in assessing it. But first - as in the case of business - let's define the goals that are pursued by the participants in civil law transactions of the corresponding type. The need to study the types of real estate value, as well as to turn to the services of an appraiser, arises in the following main cases:

- there is a transaction for the sale of an apartment, office, other building or premises;

- company's assets are evaluated;

- the size of the taxable base is determined in terms of propertyfees.

Of course, in practice there may be more reasons for real estate appraisal. For example, in some cases it becomes necessary to determine the types of estimated costs in addition to the basic procedures. Or - as an option - to evaluate real estate in order to transfer it to state needs.

Property Valuations

We noted above that the main types of enterprise value are market and investment. With regard to real estate, the same parameters can be examined, but, as a rule, a number of others come in addition. Namely - the cadastral and insurance value of the object. In some cases, liquidation is also determined. We have already considered the features of determining the market and investment value above. In the case of real estate, the general principles and methods are generally similar in form to those used in business valuation. They are only used when they are more adapted to the specifics of the relevant market: "competition" is replaced by "state" (the level of repair, finishing materials and its quality, etc.), "profitability" - by the expected "rising".

Let's now study how the figures for the cadastral, insurance and liquidation values are calculated. All of them have some specifics. Each type of determined value from the listed ones is characterized by features in terms of valuation methods. Consider them.

If we are talking about the cadastral value of real estate, then the appraiser takes as a basis the methodologyreflected in 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 specific to determining the market value of an object may also be used. Various technical documentation can be studied.

If the task is to determine the insurance value of real estate, then in this case, as a rule, the appraiser is guided mainly by market methods, but adjusted for the actual content of the sale and purchase transaction. For example, if a person buys an apartment on a mortgage, then only the loan amount can be included in the insurance cost. And in this case, the corresponding basis for calculating the amount under the contract with insurers may be lower than if the net market value of the apartment was taken as the basis.

Mortgage is an example of a market segment where the liquidation value of an object can be practically significant for subjects of civil law transactions. If, for example, an individual or organization fails to meet the conditions for repaying a loan, the bank will probably decide to sell the pledged property. Even before signing a deal to process a loan, a financial institution may wish to analyze the prospects for the liquidation component of the project.

Note, however, that some experts consider it inappropriate to use the term "liquidation value" in relation to real estate transactions when interacting with banks. Casethe fact that by default the mortgage agreement does not imply the mandatory transfer of the apartment to the bank's ownership - it is only a security measure for a loan. While in its pure form, the liquidation value implies the calculation of the price at which the owner of an object (for example, a business) will be able to sell his property (say, due to the bankruptcy of the enterprise). Therefore, the term in question in relation to real estate should be used with caution.

Cost is a constant value?

Many modern economists think not. Unless, of course, we are talking about a market economy, where there is a place for the mechanism of free pricing based on supply and demand. Regardless of what types of value of the goods are being studied, each of them is a variable value, an approximate guideline that the parties to the transaction can use 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 this is rather an exception. The ability to navigate in a changing environment of costs is one of the most important competitive advantages of any modern business.