1. Business valuation in the republic of Croatia – challenge or problem?
Dubravko Marković, GRADUATE ECONOMIST, certified auditor and permanent court expert witness for finance and bookkeeping
Ivana Manestar, GRADUATE ECONOMIST, certified auditor and permanent court expert witness for finance and bookkeeping

2. TABLE OF CONTENTS
1. INTRODUCTION 2. METHODS USED FOR BUSINESS VALUATION 3. INFORMATION ON WHICH BUSINESS VALUATION IS BASED 4. CHOICE OF VALUATION METHOD DEPENDS ON THE DEFINITION OF THE VALUER’S TASK 5. PRESENTING THE VALUATION RESULTS 6. PRACTICAL EXAMPLES 7. CONCLUSION
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3. 1. INTRODUCTION
Business valuation is not an exact science. It is a complex professional activity. There is no formula to determine a single, 100% accurate value.
The aim of this presentation is not to present valuation methods, nor is it to analyse advantages or disadvantages of a valuation method.
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4. 1. INTRODUCTION
The views and opinions expressed in this presentation primarily concern small and medium enterprises, which make up 99.7% of the total number of enterprises in the Republic of Croatia.
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5. 2. METHODS USED FOR BUSINESS VALUATION
Valuation methods are divided into static and dynamic methods.
Of the static methods, the following methods are used most frequently:
i/ Book value method;
ii/ Substance value method;
iii/ Liquidation value method.
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6. Main characteristics of method:
Book value method
Main characteristics of method:
Traditional method which is based on the assumption that the base value of an enterprise is found in the balance sheet;
Does not take into account potential future development of enterprise, cash flows, contingent liabilities arising from concluded contracts, human resource development, etc.;
Enterprise value is value of equity indicated in the relevant item on the liabilities side of the balance sheet;
Balance of assets at a particular moment;
Readily available and therefore very practical.
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7. Substance value method Main characteristics of method:
Substance value is current value of equity or current value of net assets;
Calculated based on a balanced-out balance sheet with no hidden reserves or losses;
Valuation of individual balance sheet items (their current value) is made according to business and economic criteria under the assumption of the enterprise operating as a going concern and it pertains to the enterprise as an economic unit;
Calculation of substance value implies identification of all assets and their classification as operating and non-operating assets.
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8. Liquidation value method Main characteristics of method:
Main characteristics of method:
Assumption that all assets are sold and all liabilities settled;
Net realizable value of assets based on the principle of liquidation of operations;
Market value net of liquidation costs;
Liquidation value of an enterprise:
Assessment of discounts due to forced sale of assets;
Assessment of costs of bankruptcy and enterprise liquidation;
Value calculated in this manner represents minimum value, assuming that the enterprise continues its activities in the market, in excess of liquidation value.
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9. Method of present value of future cash flows
Main characteristics of method:
Future cash flows are discounted to the value at present;
Taking into account the time value of money;
Discounting reflects the risk involved in realization of cash flows;
Based on projection of operations in future periods, taking into account the enterprise’s development ambitions;
Standard cash flow projection period is 5-7 years;
Possibility of developing various operating scenarios for the enterprise and including the synergistic effects of a potential merger;
Does not depend on the market value of other enterprises;
Generally divided into three inputs: cost of capital, expected cash flows, growth rates;
Commonly referred to as the Discounted Cash Flow (DCF) method.
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10. 3. INFORMATION ON WHICH BUSINESS VALUATION IS BASED
Information on which business value is based represents a key factor for quality assessment, regardless of the method applied.
INPUT
OUTPUT
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11. 3. INFORMATION ON WHICH BUSINESS VALUATION IS BASED
Book value method
- Based on balance sheet items;
- Balance sheets of a large part of Croatian enterprises are of dubious quality.
Some disadvantages
- Accounting policies;
- Policy of recognition of non-current fixed and intangible assets and small inventory;
- Policy of recognition of inventory;
- Policy of value adjustment of trade receivables;
- Accruals and deferrals are a matter of necessity, not a business policy;
- Actual list of assets and liabilities was never compiled;
- Regular property value appraisal was not carried out.
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12. 3. INFORMATION ON WHICH BUSINESS VALUATION IS BASED
Substance value method
- Eliminate all hidden losses and/or reserves;
- Proceed with correction of certain balance sheet items or discard the book value
method and the substance value method?
Liquidation value method
- Application of this method is doubtful;
- Secondary market for most assets in the Republic of Croatia is not functional or functions in a very limited capacity.
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13. 3. INFORMATION ON WHICH BUSINESS VALUATION IS BASED
Discounted cash flow method
Discounted cash flow method is generally based on three inputs:
- cost of capital;
- expected cash flows;
- growth rates.
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14. 4. CHOICE OF VALUATION METHOD DEPENDS ON the Definition of THE VALUER’S TASK
Valuation of small and medium enterprises in the Republic of Croatia is mostly conducted in order to calculate business value due to
- Procedures of enforcement of business shares/stakes;
- Squeeze out in accordance with the provisions of the Companies Act;
- Sale/purchase;
- Division or exchange between partners.
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15. 5. Presenting the valuation results
After the valuer has valued the enterprise, one difficult task still lies ahead – presenting the valuation results. Specialist literature lists several myths accompanying business valuation. The following ones are the most commonly mentioned: “Good valuation results in precise indication of value”; “Since valuation models are quantitative, valuation is objective”; “The more highly quantitative the model, the better the assessment”, etc.
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16. 6. PRACTICAL EXAMPLES
I. VALUATION OF 65 SHARES IN ENFORCEMENT PROCEEDINGS II. VALUATION IN SQUEEZE-OUT IN ACCORDANCE WITH THE COMPANIES ACT III. BUSINESS VALUATION DUE TO SALE IV. VALUATION IN BANKRUPTCY PROCEEDINGS V. BUSINESS VALUATION FOR THE PURPOSE OF TRANSFER TO RELATED COMPANY OPERATING IN THE COUNTRY IN WHICH THE OWNER IS RESIDENT
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17. 7. CONCLUSION
Business valuation is a complex process resulting in a range of values, depending on the circumstances and information that the valuer had at his/her disposal.
Based on the above, it can be concluded that valuers who valuate small and medium enterprises in the Republic of Croatia encounter many problems.
At the same time, the situation regarding business valuation in the Republic of Croatia also represents a challenge, since all valuation experts have a lot of work ahead of them in order for valuation quality to reach a satisfactory level.
The key factors are networking of valuers – court expert witnesses, exchange of experiences and information, and organization of training courses, where real-life practical examples would be presented.
REVIZIJA REMAR d.o.o. Zagreb