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Venture care organizational structure, vast experience in business valuations, and research tools allow it to provide excellent, supportable valuation services regardless of the type of valuation report requested and the size of the subject company.

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venture care

VENTURE CARE

Valuation Methods

Valuation Methods- Venture care| know your

company worth

More ideas For Your business

S r . N o - 2 9 , A j i k y a t a r a , k a l a n i k e t a n ,

D h a n k a w a d i , N e a r R a j s h r i S h a h u B a n k ,

business valuation is largely dependent upon

Business valuation is largely dependent upon –

Purpose of evaluation

Situation under which valuation is carried out

Bargaining power of the parties

Let us elaborate the above three a bit. First of all, business valuation is done for a certain

purpose such as:

Takeover

M&A deals

Buy Back

Outright sale

IPO etc.

Valuation approach and of course valuation figure will change in all the above cases.

Another is the situation under which valuation is done. For example, if we consider product

valuation, a 1 LTR mineral water bottle may be sold at Rs. 20 in a normal situation but when

there is the scarcity of water bottle it may bay sold double of its price.

The 3rd one is that we all know that wherever there is transaction there is valuation. If there

is arm’s length transaction then valuation figure does not need any adjustment. Interestingly,

valuation figure largely depends upon bargaining power of either buyer or seller. The stressed

sale is an example where bargaining power of buyer is strong and when there is the hunger

for inorganic growth then bargaining power of seller is strong.

Let us start observing the challenges involved in valuation on-by-one:-

1.Availability of data (qualitative & quantitative)

Quantitative data of listed company is easily available (there is the minimal scope of

manipulation).But qualitative data is very difficult to find out due to being price sensitive.

In the case of private limited companies, quantitative data is not freely available. But if

values have been approached by the management of Pvt Ltd company then they share data

easily. However, it has been found that many companies lack qualitative aspects. For

example, although the business has taken legal status of Pvt Ltd company, decision-making

authority lies with single promoter-director i.e. eventually it becomes a sole proprietorship

business.

Moreover, there is a huge scope of manipulation in data which is unaudited and the values

have no option but to rely on it.

2.Lack of concrete “businessmodel”:-

Every company has some business model. The business model is a platform to survive at

present and it helps in exploiting the current opportunities. We can observe that business

managers are very much obsessed with their business models and find them full proof and no

change is required in it.

The business model is an integral part of the valuation. For values, it is very challenging to

validate the prescribed business model (by companies) and incorporate it into the valuation.

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3 lack of growth oriented business valuation

3.Lack of growth-oriented business Valuation:-

Present valuation of business significantly depends upon business plan. The business plan is

formulated to tap the future market opportunities. Of course business plan has to be dynamic

and self-adjustable. Change in the business plan will change the valuation figure. It is very

challenging to assess the actual impact of the business plan on valuation.

4.Sales projections for the future-

Estimating sales for future is difficult. Sales depend upon either or both of the two things-

quantity and price. There is the trade-off between these two. Predicting either of the two

things is challenging. It becomes even much more challenging in the case of start-up

companies (it seems like a baby is born and her parents are predicting that she will be a

doctor).

5.Challenges in estimating discount rate:

Estimating exact discount rate is impossible. Even estimation of nearby discount rate is very

much challenging. Discount rate depends upon many factors such as fiscal and monetary

policy, inflation rate, sudden policy changes by central govt, an impact of changes in global

economic scenario etc. We cannot overlook the effect of demonetization of India which

propelled sluggish demand and hence higher discount rate in almost all the industry.

6.Challenge in converting qualitative aspects into quantitative one:-

We can say that this is the biggest challenge in business valuation. For example, how we will

convert the following in quantitative figure-

Concrete business model

Validity of business plan

Outstanding management

Well established R & D

Organizational culture

Professional attitude of management

Committed execution team etc.

7.Challenges in choosing the right valuation method and assigning them

weights:-

Generally, there are four popular valuation models:

Discounted Cash flow (DCF) model

Relative valuation model

Earning Capitalization model

DCF model.

Challenges in this model

Expected future cash flows are prone to change due to various factors such as competitors’

strategy, technological changes, brand dilution, change in management strategy etc.

How to fix up the discount rate? It is also subject to change over years. Also, there are many

factors which affect the discount rate and these factors are unpredictable.

Relative valuation model:

This model is used to value a business in relation to similar business. Earnings and/or cash

flows of the business undervaluation is compared with those of the similar business and with

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the help of the given price of the similar

the help of the given price of the similar business, the price of the business undervaluation is

estimated.

Challenges in this method are

Whether the similar business operates in the same products, markets

Whether the similar business uses the same technology

Whether the similar business is as old as this business

Whether price/value of the chosen similar business is unbiased etc.

The last popular model is Earning Capitalization model:

Under this method, Equity earning is capitalized at a certain rate. This model assumes that the

present earning shall remain fixed forever.

Challenges are

This model does not consider growth in the business.

The rate at which earning is capitalized is prone to change

No valuation method is without challenges. Valuers assign different weights to different

valuation methods and use them in combination. But is becomes pure subjective that how much

weight should be given to which method.

8.Challenges arising out of biases of the values

Some values are biased about any particular industry. Bias may be positive or negative. Not

only these many values consider already well-tested models as pure academic such as Michel

Porter’s five forces, BCG matrix et al. and discard it right away.

Another bias is that values always consider their valuation figures logical and correct and

believe that there is no scope of change anywhere.

Overcoming pills prescribed

1.

Track down the performance and strategy of listed company.

Prepare the questionnaire to be asked to the management of Pvt Ltd company. If the

management seems to be reluctant then leave asking now and after some time convince the

management that the same questions may be asked by investors/lenders.

If values find any loophole in the qualitative aspects then he must bring it to the notice of

management.

Analyze and ask questions on unaudited data

2. Ask questions on the business model and if required suggest alternative business model

orally first.

3.Same as 2nd pill

4.

If the business is already existing then past trend in sales may work like the pill at least to some

extent.

For start-ups, it very difficult and macro factors can be a guide to predict sales. Intuition may

play bit positively.

In both the cases, sensitivity analysis becomes bit helpful.

5. Only macroeconomic factors, general expectations prevailing in market and sensitivity

analysis will work.

6. Brainstorming internally

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7 the combination of methods is good

7. The combination of methods is good but for assigning weights, more than once weights

should be assigned and a “range” of valuation figure should be reached at.

8. Users of the valuation report must get clarification from the values.

To conclude, although there are many challenges at every step in valuation, valuation figure

has to be arrived at. A range of valuation figure is more practical. As and when required

sensitivity results should be analyzed.

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Ask@venture-care.com

020-65 3636 33

www venture care com

www.venture-care.com

Ask@venture-care.com

020-65 3636 33