Corporate Valuations Blog

What's Your Business Worth ?

2016-05-24T22:23:00.001-07:00

Ever Wondered what’s your Business Worth ? Our Valuation Team has prepared a crisp Video on “How to Value a Company” for its broad understanding. Do let us know your feedback.

“Knowing what business is worth and what determines its value is prerequisite for intelligent decision making”. Corporate valuations form the basis of corporate finance activity including M&A, fund raising, Sale of businesses, Succession planning and also to meet regulatory and accounting requirements. The rapid globalization of the world economy has created both opportunities and challenges for organizations leading to uncertainty blowing across global markets and raising the importance of independent valuations all over the world. Justifying the value of businesses has grown more complex and challenging as its been accepted that valuation of closely held / infrequently traded listed shares is not an exact science and depends upon a number of factors like purpose, minority/ controlling interest, stage, financials, industry, management and promoters strengths etc.

Corporate Professionals Capital Pvt. Ltd. is a SEBI Registered (Cat-1) Merchant Banker and has a successful track record of providing a broad range of M&A and Transaction Advisory Services. Our Dedicated Team has more than 10 years of rich valuation experience. Our in-house research wing regularly identifies and prepares research articles on debated issues of business valuation, including how to apply the range of valuation techniques, including their appropriate application, advantages and disadvantages. We have created a niche in Valuation Services by executing more than 500 Corporate Valuations (uncoding tangibles & intangibles) across 15 Industries for clients of International Repute and delivering well-reasoned and defensive Valuation Reports.

We value businesses (both Indian and Global) and attribute value to Equity Shareholders, Compulsory Convertible Instruments (CCPS/CCD’s) and Debt/Optionally Convertible Instruments. We also help businesses in allocating acquisition value into different set of Assets including Intangibles.

Call our Valuation Team at + 91 7210114523; email at info@corporatevaluations.in or visit our dedicated Valuation portal at www.corporatevaluations.in

Brand Valuations

2014-04-21T00:56:00.001-07:00

"If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trademarks, and I would fare better than you."— John Stuart, Chairman of Quaker

Brand has come a long way from the time when it was first thought that the brand was just another word for Logo. It is widely appreciated that brand is one of the most valuable assets an organisation owns. This is because of the economic impact that brands have. Brand influence the choices of customers, employees, investors and government authorities. A study concluded that on average brands account for more than one-third of shareholder value. The study reveals that brands create significant value either as consumer or corporate brands or as a combination of both.

Mr. Maneesh Srivastava
Sr. Manager
+919871026040
maneesh@indiacp.com

NEED OF BRAND VALUATION

A brand can be valued anytime and for many reasons, that includes- Brandstrategy, Financial Reporting, Mergers and acquisitions, value reporting, licensing, legal transaction, accounting, strategic planning, management information, taxation planning and compliance, liquidation.

Several studies have tried to estimate the contribution that brands make to shareholder value on an average brands account for more than one-third of shareholder value. The study reveals that brands create significant value either as consumer or corporate brands or as a combination of both.

Below is the whole article which you can read or download:

SUM OF THE PARTS (SoTP) VALUATION

2014-03-03T23:48:00.000-08:00

“Company A is doing Sugar Business with Value of Say Rs 100 and company B is doing Cement Business with Value of say again Rs. 100 then what should be the value of company C doing both the above business by itself, On unitary basis it should be Rs 200."

In terms of Schedule 1 of the Notification, an Indian company may issue equity shares/compulsorily convertible preference shares and compulsorily convertible debentures (equity instruments) to a person resident outside India under the FDI policy, subject to inter alia, compliance with the pricing guidelines. The price/ conversion formula of convertible capital instruments is also require to be determined upfront at the time of issue of the instruments.

Value of C company = Value of A company + Value of B company

It seems so simple; however it is not the way how valuation actually happens in the real life scenarios. That’s where the role of a valuer becomes significantly important. A corporate valuer always focus on the risk involved while undertaking any SOTP valuation and gives appropriate discounts accordingly. In the transaction history and the empirical research carried by various researchers it being well laid that the market gives discount to the sum of parts value which is known as Diversification discount or portfolio discount or conglomerate discount.

In real life scenario there are companies which are engaged in diversified business, and each business has different product line, profit margin etc, so to value diversified companies on a consolidated level, like consolidated sales and consolidated profit may not able to give a true value of the company as some business segment may fetch a high comparable companies multiple and some low Multiple. Similarly the cash flow generating components of each Biz would also be different.

To read full article, please visit the page SUM OF THE PARTS VALUATIONS on Corporate Valuations website.

For any queries related to SoTP Valuation or Business Valuations, please contact:

Mr. Chander Sawhney

Corporate Professionals

Vice President
+911140622252, +919810557353,
Email chander@indiacp.com

Mr. Maneesh Srivastava
Sr. Manager

Corporate Professionals

+9111406222255, +919871026040,
Email:- maneesh@indiacp.com

ENTERPRISE VALUE : THE MARKET VALUE OF THE WHOLE BUSINESS?

2014-02-26T21:31:00.000-08:00

Enterprise value (EV) is an economic measure which reflects the market value of a whole business. It is a sum of claims of all the security-holders: debt holders, preferred shareholders, minority shareholders, common equity holders, and others. Enterprise value is one of the fundamental metrics used in business valuation, financial modelling, accounting, portfolio analysis, etc.

EV= Market value of Equity + Market value of Debt + Minority Interest at Market Value + Preferred Equity at Market Value – Cash & Cash Equivalent + Market Value of Non Operating Assets

"Enterprise Value is the overall value of any business which represents all stakeholders and often looked at while acquiring/ selling any business or making any strategic decision and is dependent on the Value of the company, its subsidiaries and the Value of surplus assets. All the above issues are relevant for working out EV."

Enterprise Value is the present value of the claims of all stake-holders against an Enterprise where an Enterprise is financed with debt and equity. If the company has no non-operating assets, firm value can be valued by estimating future free cash flows and discounting those cash flows with an appropriate rate of return (which may vary from year to year) that embodies the returns required by creditors and shareholders of the firm.

Since this is essentially the value of operations of the firm, if there is any non-operating assets, the value of such non-operating assets should be added separately to arrive at the firm value or enterprise value.

In short enterprise value is the value shared by all investors, unlike debt value or equity value, which are shared only by creditors or by equity-holders respectively.

Key Issues and challenges while calculating EV

Should only Cash or Excess Cash be deducted?

Should only Cash be deducted or even Cash and Cash equivalents?

Should Debt be taken at Market Value?

Treatment of Debt if taken at year end or for setting up a new Business?

Treatment of Loans & Advances given to subsidiary Company?

To read the full article, please go to 'Enterprise Value' article on our website www.corporatevaluations.in.

If you have any query on Business Valuation, feel free to contact:

Mr. Chander Sawhney
Vice President

Corporate Professionals

+911140622252, +919810557353,
Email:- chander@indiacp.com

RELATIVE VALUATION

2014-02-24T01:30:00.000-08:00

Relative Valuation uses the valuation ratios of Comparable of publicly traded companies and applies that ratio to the company being valued subject to necessary adjustments. The valuation ratio typically expresses the valuation as a function of a measure of financial performance or Book Value Multiples (e.g. Revenue, EBITDA, EBIT, Earnings per Share or Book Value).

"A key benefit of Relative Valuation analysis is that the methodology is based on the current market stock price. The current stock price is generally viewed as one of the best valuation metrics because markets are considered somewhat efficient. But applying multiples is not a straight forward technique and many considerations have to be kept in mind when valuing a company. Sanity check is advised by using other valuation methods as well."

This technique hinges upon the efficient market theory which indicates that the price of exchanged securities in the market reflects all readily available information, as well as the supply and demand effects of educated and rational buyers and sellers. In other words, the market is continuously evaluating each company and expressing that valuation in bids and offers for its stock.

Advantages of Using Relative Multiples

Usefulness: Valuation is about judgment, and multiples provide a framework for making value judgments. When used properly, multiples are robust tools that can provide useful information about how similar assets are placed in the market.
Simplicity: Their very simplicity and ease of calculation makes multiples an appealing and user-friendly method of assessing value.
Relevance: Multiples focus on the key statistics that other investors use. Since investors in aggregate move markets, the most commonly used statistics and multiples will have the most impact. These factors, and the existence of wide-ranging comparables, help explain the enduring use of multiples by investors despite the rise of other methods. Most Valuation in stock markets are done through this method.

Disadvantages of Using Relative Multiples

Simplistic: A multiple has a great deal of information into a single number. By combining many value drivers into a point estimate, multiples may make it difficult to disaggregate the effect of different drivers, such as growth, on value. The danger is that this encourages simplistic – and possibly erroneous – interpretation.
Static: A multiple represents a snapshot of where a firm is at a point in time, but fails to capture the dynamic and ever-evolving nature of business and competition.
Difficult to compare: Multiples are primarily used to make comparisons of relative value. But comparing multiples always challenging, because there are so many reasons that multiples can differ, not all of which relate to true differences in value. For example, different accounting policies can result in diverging multiples for otherwise identical operating businesses.

To read the full article, please go to 'Relative Valuation' article on our website www.corporatevaluations.in.

If you have any query on Business Valuation, feel free to contact:

Mr. Chander Sawhney
Vice President

Corporate Professionals

+911140622252, +919810557353
Email:- chander@indiacp.com

VALUATION IN INFORMATION TECHNOLOGY (IT) SECTOR COMPANIES

2014-02-20T21:53:00.000-08:00

It is believed in the market that “Technology has the shelf life of a banana.” If that happens then what factors drives the value of Information Technology based companies whose survival is totally dependent on that. The answer of this question is not so easy as it appears to be, As whatever the size of organizations, large or small, face the same dilemma: Scare resources, choosing and deploying the right resources at right time & at right place to maximize the organization performance.

"It has been observed that the Valuation trend in the high growth segment of IT industry (E-Commerce & Social Networking) is on an upswing and though there exist limited public listed companies in this segment, majorly all trade at very high valuation multiples with corresponding high volatility owing to their sensitive business models, prone to competition with new technology and recent developments. Where would their Valuations be stabilized would be decided in times to come."

Why Sub Sector Categorization is necessary?

There is a difference in valuing a Company which invest in IT to increase the efficiency of its business and the Company whose survival is totally dependent on IT because Companies with a view to increase the efficiency might Invest in IT and often viewed as a cost center, and when a department is viewed solely as a cost center, budgets get squeezed year over year, but that would not be in the case of IT Co’s, as their view of investment might be different.

Therefore, to make the proper judgment on the parameters that derives the value of Companies in IT sector. We have divided the IT Sector into various Sub- Sectors...

To read the full article, please go to 'Valuation in IT Sector' article on our website www.corporatevaluations.in

If you have any query related to Information Technology Sector Companies Valuation specifically and Business Valuation in general, feel free to contact:

Mr. Chander Sawhney
Vice President

Corporate Professionals

+911140622252, +919810557353,
Email:- chander@indiacp.com

REGISTERED VALUER UNDER COMPANIES ACT 2013

2014-02-17T23:17:00.003-08:00

The Companies Act, 2013 has introduced the concept of ‘Registered Valuer’ to cover valuation in respect of any property, stock, shares, debentures, securities, goodwill or any other assets of the company including its net worth and liabilities.The Draft Rules provide that a Register of Valuers shall be maintained by the Central Government in which there shall be registered the names, address and other details of the persons registered as valuers.The eligibility criteria to be registered as a valuer have been provided in the Draft Rules. Though business valuations are required in varied situations such as court approved M&A, fresh issue of shares, transfer of shares etc., the concept of valuation as a code is new to India.The Companies Act, 1956,despite using the term ‘valuation’ in some sections,does not specify the basis on which such valuations shall be done or who will do them.

Sharing here a detailed article on Register Valuer under Companies Act 2013 which is published on Slideshare to be read or downloaded...

Mr. Chander Sawhney
Vice President

Corporate Professionals

+911140622252, +919810557353,
Email:- chander@indiacp.com

MODIFICATION OF PRICING GUIDELINES FOR FDI INSTRUMENTS WITH OPTIONALITY/ BUYBACK CLAUSE

2014-01-16T05:03:00.000-08:00

As a relief, the recent RBI notification has allowed the optionality clauses in equity shares under FDI. However, it has also prescribed that exit value will be determined at the time of exercise of the buyback option so that the investor exits without any assured IRR (confirming with the basic principle that Equity Investor cannot be not guaranteed any assured exit price at the time of making such investment).

In this context, RBI has validated a new mechanism for valuation (capping exit from unlisted companies based on ROE and listed companies based on their prevailing market price) for cases where such shares were issued with optionality clause (under Buyback arrangement).

However, specifically for exit of compulsory convertible instruments, RBI has allowed use of any internationally accepted pricing methodology duly certified by a Chartered Accountant or a SEBI registered Merchant Banker which provides more flexibility and discretion to the foreign investors (compared to sole method of DCF prescribed till now).

Download RBI Circular Here

To know how we can assist you with our FDI Valuation Services, please contact:

Mr. Chander Sawhney
Vice President

Corporate Professionals

+911140622252, +919810557353,
Email:- chander@indiacp.com

Mr. Pankaj Singla
Sr. Associate

Corporate Professionals

+9111406222293, +919971508320,
Email:- pankaj@indiacp.com

MANTRA FOR PITCHING YOUR BUSINESS

2014-01-07T04:43:00.000-08:00

If you have started a business and have travelled the road from the idea or the conception point to the stage of actually delivering the product or service to the customer, then it is right time to become cautious. While taking any step forward a lot of options start taking place. Somebody might feel interested to pay you cheap money to buy your company, somebody wants to acquire stake in your business at a bottom level valuation, and somebody might copy your idea and start making big. The simple mantra is “If you have an apple, don’t sell it like banana”.

Mr. Maneesh Srivastava
Senior Manager
+91-9871026040
maneesh@indiacp.com

There are so many ideas but very few able to take shape and reach scalability. The passion is one factor which drives the business, but there are some useful tips for the entrepreneur who has entered the virgin land and want to make big.

You should have a unique business model- Every investor talks about uniqueness of your business model. It is not so that you have to found something which does not exist on this earth. What is needed that you have to add exciting features to your products and services. E.g. there are three fruit sellers in the market selling oranges, out of them one is selling the oranges with few leaves attached to oranges and placing a board on his thela that those are handpicked; he is surely going to make a difference in the topline as well in the bottom line.

1. Promoters background

In the start of the business what is most needed is the image of the promoter and his background as the promoter has credentials but not his new venture, so he has to attach his credentials to the business like his technical expertise, his experience, his network, and his past performances. E.g. Mr. Sachin Bansal and Mr. Binny Bansal founder of the e- commerce portal Flipkart have the first hand experience working with the ecommerce giant Amazon. I am not denying the fact that somebody can’t start something in which they don’t have firsthand experience but the only saying it is easy to pitch , easy to understand something which you are experienced at as you know the nitty-gritty of business. Even if you don’t have a background you can hire professionals and can place people with credentials in our board of advisory which will create value.

2. Knowledge of market

The first and the foremost thing is to do a feasibility study and understand the size of the market, its potential, its geography and the medium to reach the market. There may be ideas which are unique but do not have potential to scale up or have a limited size. E.g. you suppose to start an ecommerce portal with the name

www.chandnichowkbazaar.com

to consolidate the kirana shop owners who will not be able to reach the customers as people don’t feel like going to such a busy market with no parking area. This idea, though unique, is not able to sell hard as the portal has a limitation of the market i.e. restricted to Chandni Chowk itself, scalability shall be an issue.

3. Creating hype in the media

It is not that you have to create a selling pitch; what is needed is creating an information pitch and selling the uses of the product rather than the product itself. You have to use the right media, increase Google ranking of your business website, SEO of your business with keywords to increase your ranking. Today virtual world is more dynamic than the real world and has a greater reach. You can get the grading of your equity shares as well as debt from rating agencies.

4. The cash flow of business

The cash flow generation is the key value driver of business, though the history of the company plays a role, however for a new venture the future potential is of prime importance as the value unlocking can take place by looking into the future. But the business model should be one which is scalable and stainable and the company has placed the infrastructure i.e. made Capex to run the business show.

5. The stake dilution

The startup entrepreneurs should not look for equity dilution at the conception stage as a small amount of capital infusion from angel investor will dilute the equity stake by a substantial level. What is needed that the equity dilution should be undertaken in tranches not in one go. You should dilute a little and grow and keep it doing like this, as it will give you better value everytime.

6. Go to moderator

You should not try to do everything on your own. There are moderators who can give you advice as well as they will help you in shaping your business with the right advice at the right time.

7. Dilute stake only when getting better valuation

When you have successfully passed the conception stage and grown to a sizable amount but not getting a better valuation because of bear market phase, it’s better to take debt because you are not parting away your stake but only have to pay off interest. You can dilute a stake later at a higher valuation.

HOW TO VALUE A BUSINESS?

2013-12-21T02:53:00.000-08:00

Valuing a business is a science as well as an art. Before starting the valuation exercise, the very first step is to look into the economy of the geography in which it is operating, then the Industry in which the company falls and then finally the company itself i.e. the top down approach.

The company is a constituent of an industry and then of the economy in which it falls as the valuation of the company vary from industry to industry and from geography to geography.

Mr. Maneesh Srivastava
Senior Manager
+91-9871026040
maneesh@indiacp.com

Two companies with the same top line and the same bottom line may get very different business valuation if there industry segment is different as the market multiple of the two company may vary significantly.

After understanding the economy and the industry the valuer needs to look into the standard of value and the premise of value.

The standard of value is of prime importance as it help to understand for what purpose we are valuing the business i.e. for regulatory purpose or for investment purpose or else and premise of value is used to understand whether we are valuing business on a going concern basis or on a liquidation basis.

There are three approaches to valuation-

The Asset approach,

The Income Approach and

The Market Approach.

Each approach has their own importance and it significance vary from Industry to Industry, like the Asset Approach is of prime importance when undertaking the valuation of Real estate companies which have land bank, while the Income approach is relevant when valuing a service company and market approach is prevalent when we need to understand the value of our company business on the basis the listed peer companies are getting value in the market.

The company which don’t have a strong balance sheet but have a very promising business plan and effective and experienced management team shall able to brag the higher value and here the most suitable valuation methodology shall be the discounted cash flow and forward year valuation multiple.

It being considered that the market is efficient and whatever price the stock are getting in the market as well whatever multiple the frequently traded stock are getting are true and valuation is justified on that basis.

Whichever private equity deals are taking place in the market, is taking place on the basis of multiple like PE Multiple, Ebitda Multiple or else. Transaction multiple at such time is very important for any deal as the market plays a dominant role for deciding the value of the company.

The few factors needed to be taken care of while undertaking any valuation exercise are

Promoter’s background,

Succession planning of the company,

Nature of business of the company,

Economic outlook in general and outlook of the specific company in particular,

Dividend paying capacity of the company,

Past history and trend of business,

Future potential of a business,

Contingent liability or substantial legal issue,

Concessional tax if any the company is enjoying,

Corporate governance practices etc.

PATENT VALUATION- THE VALUE DRIVER OF BUSINESS

2013-12-02T03:12:00.000-08:00

A patent is a set of exclusive rights granted to an inventor or their assignee for a limited period of time, in exchange for the public disclosure of the invention. An invention is a solution to a specific technological problem which helps in inventing something new or which helps in increasing the efficiency of a process.

In the current context, the intangible plays a significant part in creating value preposition of the company. The business value covers both the tangible and intangibles. Valuation of intangibles becomes relevant when there is a need to do purchase price allocation i.e. when you want to allocate the excess of the consideration paid for acquiring the asset over and above the tangible assets.

Historically the excess consideration paid over and above the tangible assets is adjusted as goodwill, however if we can identify the tangible assets of business then allocation of value can be made to it and post this balance left is considered as goodwill.

In the books of account the intangible finds a place if it is acquired from outside, however if it is self generated then its impact is not considered in the books of account.

Valuation of patent

Traditionally, there are three approaches to valuation

· Cost Approach

· Market Approach

· Income approach

Ideally, all three approaches need to be looked at while deciding the value of patent. However, we give preference to income approach for valuing unique, income generating properties such as patents.

A cost approach is seldom useful for patents, and market approach may not be relevant because patent are unique by definition and comparable patents may be difficult to identify.

The most prominent approach to patent valuation is income approach which considers method like royalty based or profit contribution method which can factor in the cash flow stream generated by patent.

Check-list of documents needed to be taken care while assigning value to patent are -

Ø Check whether the patent is in force or not and patent maintenance fee is paid or not if not patent is worthless.

Ø Description of any litigation, past or present.

Ø Copies of any contract, licensing agreement or offer to license pertaining to patent.

Ø Available economic data on the industry in which invention is used.

Ø Useful life of patent.

Ø Inquire about patent validated.

Ø Details of any prior royalties paid for patent.

Ø Identify the next best alternative technology.

Ø The projected cash flow from patent.

This article has been written by :-

Mr. Maneesh Srivastava
Sr. Manager

Corporate Professionals

+9111406222255, +919871026040,
Email:- maneesh@indiacp.com

ADJUSTED NET ASSET METHOD OF VALUATION

2013-10-20T22:33:00.002-07:00

Continuation of previous post- METHODOLOGIES OF VALUATION : ASSET BASED METHOD

For Calculating the Adjusted NAV, the valuer should factor in the contingent liability, Tax Shield on accumulated losses, impact of Auditor qualification and Due Diligence, money to be received from warrants, stock options and impact of corresponding shares.

Book Value Method

This form of valuation is based on the books of a business, where owners' equity i.e. total assets minus total liabilities are used to set a price. There are a couple of problems with this simplified method. First, unless you audit the business' books, you cannot be certain that the numbers presented are correct. Secondly, the value of some assets, such as buildings, equipment and furniture/fixtures, may be overstated in the books, and may not reflect the maintenance and/or replacement costs for older assets. As a result, most business valuation experts prefer to use an adjusted book value.

Liquidation Value Method

This method is similar to the book valuation method, except that the value of assets at liquidation is used instead of the book or market value of the assets. Using this method, the liabilities of the business are deducted from the liquidation value of the assets to determine the liquidation value of the business. The overall value of a business using this method should be lower than a valuation reached using the standard book or adjusted book methods.

Replacement Value Method

This type of business valuation is similar to an adjusted book value analysis. Replacement value is different from liquidation/book value in as much as it uses the replacement value of assets rather the liquidation/book value of assets which is usually higher than book/liquidation value. Liabilities are deducted from the replacement value of the assets to determine the replacement value of the business.

Since the replacement methodology assumes the value of business as if a new business is being set up, this methodology may not be relevant in the case of valuation for a going concern.

To know how we can assist you with our Valuation Services, please contact:

Mr. Chander Sawhney

Vice President

Corporate Professionals

+911140622252, +919810557353

Email:- chander@indiacp.com

Mr. Maneesh Srivastava
Sr. Manager
+911140622253, +919871026040,
Email:-maneesh@indiacp.com

METHODOLOGIES OF VALUATION : ASSET BASED METHOD (NAV)

2013-10-14T04:49:00.001-07:00

The asset based method views the business as a set of assets and liabilities that are used as building blocks to construct the picture of business value. Since every operating business has assets and liabilities, a natural way to address this question is to determine the value of these assets and liabilities. The difference is the business value.

However, the Net Asset Value reflected in books do not usually include intangible assets and earning potential of the business and are also impacted by accounting policies which may be discretionary at times.

Thus, NAV is not perceived as a true indicator of the fair business value. However, it is used to evaluate the entry barrier that exists in a business and is considered viable for companies having reached the mature or declining growth cycle and also for property and investment companies having strong asset base.

To know how we can assist you with our Valuation Services, please contact:

Mr. Chander Sawhney

Vice President

Corporate Professionals

+911140622252, +919810557353

Email:- chander@indiacp.com

Mr. Maneesh Srivastava
Sr. Manager
+911140622253, +919871026040,
Email:-maneesh@indiacp.com

BUSINESS VALUATION

2013-09-24T22:33:00.000-07:00

Valuation is more on an art based on the professional experience of the valuer rather than a science based on empirical studies and logics. Though internationally business valuations are governed by broadly various standards like: Valuation Standards of American Institute of CPAs (AICPA), American Society of Appraisers (ASA), Institute of Business Appraisers (IBA), National Association of Certified Valuation Analysts (NACVA), The Canadian Institute of Chartered Business Valuators (CICBV), Revenue Ruling 59- 60 (USA), ICAI Valuation Standard (recommendatory) however keeping in view the growing relevance and importance of valuation in business and investment decisions as well as in regulatory compliance processes the development of practice of valuation as a discipline and profession in the present context has become a necessity because of imperatives of financial markets, emerging global economy, and changing framework of accounting and financial reporting.

An insight into business valuation

Knowing what business is worth and what determines its value is prerequisite for intelligent decision making. It is pertinent to mention that valuation of a business is not an exact science and ultimately depends upon a number of factors like the purpose, stage of business, assets, income and liabilities, industry scenario, market recognition, promoters and management background and intangibles etc.

Standard and Premise of value?

To determine the value of any business, the reasons for and circumstances surrounding the business valuation must be pre ascertained. These are formally known as the “Standard of value” and “Premise of value”.

To be precise, the “Standard of Value” is the hypothetical conditions under which the business is valued and the “Premise of Value” relates to the assumptions upon which the valuation is based.

Key facts of business valuation

Price is not the same as value

Value varies with person, purpose and time

Transaction concludes at negotiated prices

Valuation is hybrid of art & science

Some reasons to get business valuation

Generally acceptable methodologies of valuation

There are broadly three approaches to valuation which need to be considered in any business valuation exercise. A number of business valuation models can thus be constructed that utilize various methods under the broad business valuation approaches. Most treatises and court decisions encourage the valuer to consider more than one method, which must be reconciled with each other to arrive at a value conclusion. Understanding of the internal resources and intellectual capital of the business being valued is as important as the economic, industrial and social environment.

· Asset approach

· Income approach

· Market approach

Asset approach (NAV)

Generally the Net Asset Value reflected in books do not usually include intangible assets enjoyed by the business and are also impacted by accounting policies which may be discretionary at times. NAV is not perceived as a true indicator of the fair business value. However, it is used to evaluate the entry barrier that exists in a business and is considered viable for companies having reached the mature or declining growth cycle and also for property and investment companies having strong asset base.

Book value method - It is based on the balance sheet review of assets and liabilities;
Replacement cost method - It is based on current set up cost of plant of a similar age, size and capacity;
Liquidation value method - It is based on estimated realizable value of various assets.

Income approach

The Income based method of valuations are based on the premise that the current value of any business is a function of the future value that an investor can expect to receive from purchasing all or part of the business.

Discounted Cash Flow Method (DCF) - DCF expresses the present value of the business as a function of its future cash earnings capacity. In this method, the appraiser estimates the cash flows of any business after all operating expenses, taxes, and necessary investments in working capital and capital expenditure is being met. Valuing equity using the free cash flow to stockholders requires estimating only free cash flow to equity holders, after debt holders have been paid off.
Capitalization of earning method - The capitalization method basically divides the business expected earnings by the so-called capitalization rate. The idea is that the business value is defined by the business earnings and the capitalization rate is used to relate the two.

Market based approach

In this method, value is determined by comparing the subject, company or assets with its peers or Transactions happening in the same industry and preferably of the same size and region. This is also known as relative valuation method.

Comparable companies multiples approach- Market multiples of comparable listed companies are computed and applied to the company being valued to arrive at a multiple based valuation.
Comparable transaction multiples method - This technique is mostly used for valuing a company for M&A, the transaction that have taken place in the industry which are similar to the transaction under consideration are taken into account.
Market value approach - The Market value method is generally the most preferred method in case of frequently traded Shares of companies listed on stock exchanges having nationwide trading as it is perceived that the market value takes into account the inherent potential of the company.

Other valuations approaches

Contingent claim approach - Under this valuation approach, option pricing model is applied to estimate the Value. Generally ESOP valuation for accounting purpose is done using the black scholes method. Now even Patent Valuation is also done using black scholes method.
Price of recent investment approach - Under this valuation approach, the recent investment in the business by an independent party may be taken as the base value for the current appraisal, if no substantial changes have taken place since the date of such last investment. Generally the last investment is seen over a period of last 1 year and suitable adjustments are made to arrive at current value.
Rule of thumb approach - Although technically not a valuation method, a rule of thumb or benchmark indicator (like EV per room in hotel business) is used as a reasonableness check against the values determined by the use of other valuation approaches.

Valuation - Indian considerations

For so long, valuation has been debated in India as an art or science and substantial part of the litigation in Mergers & Acquisitions (M&A) takes place on the issue of valuation as it involves an element of subjectivity that often gets challenged. More so, as in India, there are not much regulator prescribed standards for business valuation specifically for unlisted and private companies so in many cases the valuation lacks the uniformity and generally accepted global valuation practices. Even limited judicial guidance is available over the subject in India. Further, absence of any stringent course of action and non regulation under any statute is also leading to loose ends.

o Institute of Chartered Accountants of India (ICAI) has recently developed and recommended Business Valuation Practice Standards (BVPS) aiming to establish uniform principles, practices and procedures for valuers performing valuation services in India.

o The introduction of concept of Registered Valuer in the Companies Bill, 2012 (yet to be enacted) could now set the Indian valuation standards for standardizing the use of valuation practices in India, leading to transparency and better governance.

Concluding thoughts

Valuation is more on an art based on the professional experience of the valuer rather than a science based on empirical studies and logics. Though Internationally Business Valuations are governed by broadly various standards like: Valuation Standards of American Institute of CPAs (AICPA), American Society of Appraisers (ASA), Institute of Business Appraisers (IBA), National Association of Certified Valuation Analysts (NACVA), The Canadian Institute of Chartered Business Valuators (CICBV), Revenue Ruling 59- 60 (USA), ICAI Valuation Standard (recommendatory) however keeping in view the growing relevance and importance of valuation in business and investment decisions as well as in regulatory compliance processes the development of practice of valuation as a discipline and profession in the present context has become a necessity because of imperatives of financial markets, emerging global economy, and changing framework of accounting and financial reporting.

For any Professional Query, please contact:

Mr. Chander Sawhney

Vice President

Corporate Professionals

+911140622252, +919810557353
Email:- chander@indiacp.com

Corporate Valuations Blog

What's Your Business Worth ?

Brand Valuations

NEED OF BRAND VALUATION

SUM OF THE PARTS (SoTP) VALUATION

Value of C company = Value of A company + Value of B company

ENTERPRISE VALUE : THE MARKET VALUE OF THE WHOLE BUSINESS?

Should only Cash or Excess Cash be deducted? Should only Cash be deducted or even Cash and Cash equivalents? Should Debt be taken at Market Value? Treatment of Debt if taken at year end or for setting up a new Business? Treatment of Loans & Advances given to subsidiary Company?

RELATIVE VALUATION

Advantages of Using Relative Multiples

Disadvantages of Using Relative Multiples

VALUATION IN INFORMATION TECHNOLOGY (IT) SECTOR COMPANIES

Why Sub Sector Categorization is necessary?

REGISTERED VALUER UNDER COMPANIES ACT 2013

MODIFICATION OF PRICING GUIDELINES FOR FDI INSTRUMENTS WITH OPTIONALITY/ BUYBACK CLAUSE

MANTRA FOR PITCHING YOUR BUSINESS

1. Promoters background

2. Knowledge of market

3. Creating hype in the media

4. The cash flow of business

5. The stake dilution

6. Go to moderator

7. Dilute stake only when getting better valuation

HOW TO VALUE A BUSINESS?

The Asset approach, The Income Approach and The Market Approach.

PATENT VALUATION- THE VALUE DRIVER OF BUSINESS

Valuation of patent

Check-list of documents needed to be taken care while assigning value to patent are -

ADJUSTED NET ASSET METHOD OF VALUATION

Book Value Method

Liquidation Value Method

Replacement Value Method

METHODOLOGIES OF VALUATION : ASSET BASED METHOD (NAV)

BUSINESS VALUATION

An insight into business valuation

Standard and Premise of value?

Key facts of business valuation

Price is not the same as value Value varies with person, purpose and time Transaction concludes at negotiated prices Valuation is hybrid of art & science

Some reasons to get business valuation

Generally acceptable methodologies of valuation

Asset approach (NAV)

Income approach

Market based approach

Other valuations approaches

Valuation - Indian considerations

Concluding thoughts

Should only Cash or Excess Cash be deducted?

Should only Cash be deducted or even Cash and Cash equivalents?

Should Debt be taken at Market Value?

Treatment of Debt if taken at year end or for setting up a new Business?

Treatment of Loans & Advances given to subsidiary Company?

The Asset approach,

The Income Approach and

The Market Approach.

Price is not the same as value

Value varies with person, purpose and time

Transaction concludes at negotiated prices

Valuation is hybrid of art & science