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Presented By CA Swatantra Singh, B.Com , FCA, MBA Email ID: singh.swatantra@gmail.com New Delhi , 9811322785 , www.caindelhiindia.com, www.carajput.com. VALUATION OF BUSINESS. What is Business? .

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slide1

Presented By

CA Swatantra Singh, B.Com , FCA, MBA

Email ID: singh.swatantra@gmail.com

New Delhi , 9811322785,

www.caindelhiindia.com, www.carajput.com

what is business
What is Business?
  • State of being busy, in the context of the individual as well as the community or society.
  • The social science of managing people to organize and maintain collective productivity toward accomplishing particular creative and productive goals, usually to generate profit.
what is valuation
What is Valuation?
  • The act or process of assessing value or price of financial asset or liability;
  • Valuation is done of assets-tangible as well as intangible and also for liabilities –e.g. bonds issued
  • Financial valuation may involve
    • Asset valuation
    • Business valuation
what is business valuation
What is Business Valuation ?
  • A business valuation determines the value of a business enterprise or ownership interest.
  • The methods depend upon purpose.
  • The theoretical valuation arrived at has to be perfected with market criteria, as the final purpose is usually to determine potential market prices
slide6

Value to whom?

Descendents

Prospective Buyer

Partners

Employees

Investors

Sellers

valuation time
Valuation time
  • Events that trigger the need for valuation
    • Disputing the conclusions of regulatory investigation
    • Planning for an initial public offering of company shares
    • Selling the company or hiving off a division
    • Conducting a major strategic-planning
    • Applying for loan
    • Seeking investors
valuation time1
Valuation time…
  • Creating a company stock-option plan.
  • Breaking up a partnership
  • Getting a divorce
  • Liquidation /Filing for bankruptcy.
  • Doing estate or gift planning that involves company stock
steps in valuation process
Steps in Valuation process
  • Engagement of expert
  • Research and data gathering
  • Analysis and estimate of value
  • Reporting Process
skills required from expert
Skills required from expert
  • Understanding the concept and purpose of valuation
  • Taxation aspects
  • Accounting standards related to business combinations, intangible assets, employee options and financial instruments
  • Understanding of performance measurement criteria for stock options
engagement of expert
Engagement of expert
  • Determine that the expert has the competence and experience .
  • Consider and discuss whether there is any conflict of interest.
  • Determine if the expert has sufficient resources to perform the work
  • Consider scope of work to be performed and other issues, including the plan for payment of fees and expenses.
engagement of expert1
Engagement of expert…
  • Determine the standards to be used
  • Determine the criteria that will be used to measure the experts/advisers work and document those criteria in an agreement
  • Consider Form of report
  • Draw up a confidentiality agreement
engagement of expert2
Engagement of expert…
  • Determine the legal interest to be valued & purpose of valuation
  • Fees should be one of the considerations of selecting –do not settle for lowest vendor or use competitive bidding.
issues to be considered
Issues to be considered
  • Nature of business
  • History of Business
  • Economic outlook and the conditions of the specific industry
  • Financial condition and company’s earning capacity
  • Dividend paying capacity and history
  • Market price of comparable publicly traded companies
  • Goodwill of the company
  • Dependency of company’s value on current management
information to be provided
Information to be provided
  • Financial statements
  • Tax returns
  • Accounts receivable, accounts payable and inventory detail
  • Contracts/leases
  • Budgets/forecasts
  • Governance body minutes
  • Organization chart
  • Marketing material/price lists
resources required
Resources required
  • Business valuation publications
  • Industry information
  • Economic data
  • Market transaction data
  • Other resources
1 business valuation publications
1. Business valuation publications
  • General Business Valuation
  • Transaction Data
  • Industry-Specific Valuation
  • Cost of Capital
  • Professional Practice Valuation
  • Partnership Valuation
  • ESOP Valuation
business valuation publications
Business valuation publications…
  • Mergers & Acquisitions Valuation
  • Intangible Assets Valuation
  • Sample Valuation Reports
  • Financial Reporting Valuation
  • Valuation Software Technology Valuation
  • Real Estate Valuation etc.
2 industry information
2. Industry information
  • Industry overview
  • Issues
  • Trends & outlook
  • Financial ratios and benchmarking
  • Compensation and salary structure
3 economic data
3. Economic data
  • Bond yields and interest rates
  • Inflation and cost living data
  • Economic forecast resources.

4. Market transaction data

  • cost of equity capital,
  • equity risk premiums
5 other resources
5. Other resources
  • Business valuation multiples (derived from company merger and acquisition transaction data)
  • Legal and tax resources
    • Tax regulations
    • Case laws
valuation process1
Valuation process
  • Decide on business valuation method to be used
  • Analyze the company information in conjunction with the industry and comparable company data.
business valuation methods
Business Valuation Methods
  • Book value-based on books of accounts
  • Income Capitalization Valuation Method-determine the capitalization rate (rate of return required to take on the risk of operating the business). Earnings are then divided by that capitalization rate
business valuation methods1
Business Valuation Methods…
  • Discounted Earnings- determines the value of a business based upon the present value of projected future earnings, discounted by the required rate of return (capitalization rate).
  • Discounted Cash Flow valuation- present value of liabilities is subtracted from the combined present value of cash flow and tangible assets, which determines the value .
business valuation methods2
Business Valuation Methods …
  • Price Earning multiple: Price-earnings ratio (P/E) is the price of a company's share in the public market divided by its earnings per share. Multiply this by the net income to get a value for the business
  • Replacement value : It uses the value of the replacement value of assets. Liabilities are deducted from the replacement value of the assets to determine the replacement value.
business valuation methods3
Business Valuation Methods …
  • True value or market value: It is the amount that a buyer is finally willing to pay
  • Dividend Capitalization: Determine dividend paying capacity of a business
  • Sales Multiple Business Valuation: Widely used method. Annual sales multiplied by industry multiplier ( Obtain from financial publications or comparable business)
business valuation methods4
Business Valuation Methods …
  • Profit Multiple Business Valuation: Another widely used method. Pre tax profits multiplied by industry multiplier
  • Liquidation Value: Liquidation value uses the value of the assets at liquidation. Liabilities are deducted from the liquidation value of the assets to determine the liquidation value of the business. Liquidation value can be used to determine the bare bottom benchmark value
contents of report
Contents of report
  • Description of engagement
  • Description of business being valued-background
  • Description of the information underlying the valuation
    • Budgets
    • Assumptions
    • Availability and quality of underlying data
    • Statement of responsibility for information received
contents of report1
Contents of report
  • Description of procedures
    • Principle of valuation used
    • Valuation method used
    • Procedure for making projections
    • Significant assumptions
  • Conclusion
    • Clear range of values and explanation
valuation reports
Valuation Reports
  • Limited Scope Valuations
  • Formal Valuations
  • Mergers and Acquisitions
  • Comprehensive valuations
cost of valuation
Cost of Valuation

The cost depends on :

  • Revenue of the business
  • The purpose of the valuation
    • Obtain a ballpark figure or price range
    • Asset allocation
    • Estate planning
    • Partnership
    • Litigation
cost of valuation1
Cost of Valuation…
  • The availability, completeness and organization of the company's financial records
  • The type of details required in the report
    • Simple estimate of price range
    • Report with supporting documentation
    • Comparison with peer operations
    • Financial projections
fee structure
Fee structure
  • A deposit to review the project and list of fixed assets.
  • After the review, the adviser will prepare an outline for business valuation and will prepare a quote for services .
  • Disbursements and other miscellaneous charges are additional. These include expenses incurred during the project, for example, travelling, telephone and photocopy.
before selling a business
Before selling a business
  • Define priorities
    • Expectation from sale
    • Terms of payment
    • Expectation from buyer-continue with traditions etc.
  • Timing of sale
    • When economy is strong
    • Industry performance is all time high
  • Plan early
    • Make business attractive
    • Take time to find appropriate buyer
before selling a business1
Before selling a business
  • Renew all contracts and leases: Prospective buyers may not prefer a business if immediately on acquisition they have to renegotiate key contracts & leases.
  • Take the help of experts: numerous regulations and tax matters to be considered .Also, owners are emotionally attached to do the valuation on their own.
tax concerns
Tax concerns
  • Structuring the Sale-Structure to minimise tax liability
  • Structuring the company
  • Sale of assets or sale of stock
  • Reporting the sale
remember
Remember!
  • Method of valuation selected depends on purpose of valuation
  • All valuation models have their limitations
  • Results will depend on quality of input data
  • All valuation models involve large number of assumptions
slide45

Presented By

  • CA Swatantra Singh, B.Com , FCA, MBA
  • Email ID: singh.swatantra@gmail.com
      • New Delhi , 9811322785,
      • www.caindelhiindia.com,
      • www.carajput.com