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Valuation of Business
Valuation of business is the process of estimating the worth of the business of an entity, keeping in mind the various synergetic benefits that the entity will be generating in future. Valuation involves various methods and techniques, ranging from simple to complex, in order to compute the fair value of the business. The methods to be adapted for the valuation of business depend on the nature of the business of the entity and various other related factors. Following are some of the methods of valuation of business:
Income Approach
- Discounted Cash Flows;
- Option Method.
Market Approach
- Market Price
- Similar/Direct Transaction Approach
- Guideline Company Approach (i.e., Earnings Multiples)
Asset Based Approach
- Net Assets
- Replacement Value/ Realisable Value
Requirements for Valuation
- Raising Capital: Raising funds from PE funds and Venture Capitalists funds;
- Business Restructuring: Restructuring the business by way of Merger or Acquisition or Purchase/ Sale of business;
- Tax Compliances: In order to comply with Income Tax Provisions;
- Transfer Pricing Compliances: In order to comply with Transfer Pricing provisions under Income Tax Act;
- Foreign Direct Investment: For issue of shares of Domestic Company to Foreign Company;
- Accounting: Preparation of Financial Statements as per the requirement of Ind AS (Indian adapted version of IFRS)
- Family Separation: Valuing the business at the time of partition of the Family Business.
Procedure
Understanding the business and the purpose of valuation.
Collection of relevant information and documents and discussions with Management.
Performing data analysis and reviewing the information provided by Client.
Selecting the appropriate method of valuing the business, basis the nature of business.
Valuing the business and issuing the valuation report to the client.
DOCUMENTS REQUIRED
- Purpose of valuation
- MOA / AOA in case of companies
- Past Year financials in case of already existing Company
- Projected financials of the business entity
- Any other documents as required from time to time
FREQUENTLY ASKED QUESTIONS
1. When is valuation of business required?
– Valuation of business is required at the time of raising of capital, business restructuring, issue of shares outside India, complying the tax and accounting provisions, partition of family business, etc.
2. How does valuation process works?
– Valuation involves various methods and techniques, ranging from simple to complex, in order to compute the fair value of the business. Methods to be adapted depend upon the purpose for which the valuation is being done along with the nature of business of the entity.
3. For how many years the valuation report will remain valid?
– The valuation report will remain valid only upto the date of the valuation report.
4. What is the difference between a “Value” and a “Price”?
– A Value is computed applying various types of methodologies and basis the various assumptions. Whereas, a Price is the negotiated amount between the buyer and the seller in order to enter into the transaction. The price of the transaction may or may not be equivalent to the fair value of the business.
5. What are the factors that affect the value of the business?
–
- Future profitability;
- Stable growth in cash flows;
- Competitive advantages;
- Nature of business;
- Prevailing economic conditions, etc.