Introduction to Business Valuation, Fair Market Value, reasons and elements of business valuation, methodologies of business valuation, case study on net asset value.

1. 1
BUSINESS VALUATION
29/01/2014
MET’s Institute of Management

2. Outline
2








Business Valuation Introduction
Reasons for a Business Valuation
Elements of Business Valuation
Standards of Value
Business Valuation Methodologies
Sample Case Reports
Expert’s View
Conclusion
MET’S Institute of
Management
Business Valuation

3. Value
3

What is Value?

Who wants to Value?

When to Value?

How to Value?
MET’S Institute of
Management
Business Valuation

4. Business Valuation
4
“The act or process of determining the value of a
business enterprise or ownership interest therein.”
*International Glossary of Business
Valuation.
*IRS Business Valuation Guideline 2006.
MET’S Institute of
Management
Business Valuation

5. Reasons for Business Valuation
5








Sale of business or part interest
Ownership Disputes
Financing
Buy-Sell Agreements
Employee Stock Ownership Plans
Estate Planning
Change of Business Structure
Recapitalization
MET’S Institute of
Management
Business Valuation

6. Elements of Business Valuation
6

Economic Conditions

Normalization of Financial Statements

Valuation Approach
MET’S Institute of
Management
Business Valuation

7. Standards of Value
7

Market Value (Fair Market Value)

Fair Value (FASB Definition)

Fair Value (Legal Definition)
MET’S Institute of
Management
Business Valuation

8. Fair Market Value
8
Revenue Ruling 59-60
“ The price at which the property would change hands
between a willing buyer and a willing seller, neither
being under compulsion to buy or sell and both
having reasonable knowledge of relevant facts.”
MET’S Institute of
Management
Business Valuation

9. Fair Market Value (contd…)
9
Revenue Ruling 59-60 Factors






The nature of the business and its history since inception
The economic outlook in general and outlook of the specific
industry in particular
The book value of the stock and the financial condition of the
business
The earning capacity of the company
The dividend paying capacity
Whether or not the enterprise has goodwill or other intangible
value
MET’S Institute of
Management
Business Valuation

10. Fair Value (*FASB Definition)
10
Is defined as the price that would be received to
sell an asset or paid to transfer a liability in an
orderly transaction between market participants at
the measurement date.
*FASB: Financial Accounting Standards Board
MET’S Institute of
Management
Business Valuation

11. Fair Value (Legal Definition)
11
Fair Value, is often used in court cases to
compensate a party for the involuntary use of an
asset, such as eminent domain, where there is no
reasonable assumption of a fair market value
transaction.
MET’S Institute of
Management
Business Valuation

12. Business Valuation Methodologies
12
Two fundamental bases on which a company may
be valued:
 As
a going concern, and
 As
if in liquidation
MET’S Institute of
Management
Business Valuation

13. Going Concern Valuation
13
Going concern value assumes that:

The company will continue in business

Enterprise’s earning power

Cash generation capabilities
As indicators of its fair market value
MET’S Institute of
Management
Business Valuation

14. Going Concern Valuation (contd…)
14
GC Valuation Approaches
Income Based
Asset Based
Market Based
Value Estimate
Determining a value
indication of a business
using one or more methods
that convert anticipated
economic benefits into a
present single amount.
Value Estimate
Determing a value indication
of a business based on the
value of the assets net
liabilities.
Value Estimate
Determining a value indication
of a business by using one or
more methods that compare
the subject to similar
businessess that have been
sold.
MET’S Institute of
Management
Business Valuation

15. Income Based Approach
15

This approach uses the economic principle of expectation

Under this approach, one estimates the future returns of the
business

Returns are then matched against the risk associated

The risk is then quantified by means of the so-called
capitalization or discount rates.

The methods under the Income Approach include:

Discounted cash flow method.
 Multiple
MET’S Institute of
Management
of discretionary earnings method.
Business Valuation

16. Asset Based Approach
16

It considers the underlying business asset

To estimate the value of overall business enterprise

This approach relies upon the economic principle of
substitution

It seeks to estimate the costs of re-creating a business of
equal economic utility

BV methods under the Asset Approach include:

Asset accumulation method.
 Capitalized
MET’S Institute of
Management
excess earnings method.
Business Valuation

17. Market Based Approach
17

Consults the market place for indications of business value

Sales of similar businesses are studied to estimate the value
of Business

This approach uses the economic principle of competition

BV methods under the Market Approach are:

Comparative private company transaction method.

Comparative publicly traded company transaction method.
MET’S Institute of
Management
Business Valuation

18. Liquidation Valuation
18
Liquidation value assumes that:

A business has greater value

If its individual assets are sold to the highest bidder and

The company ceases to be a going concern
MET’S Institute of
Management
Business Valuation

19. 19
Case Analysis
MET’S Institute of
Management
Business Valuation

20. Balance sheet of Mrs. XYZ ltd for the year ended 2013
Particulars
Amount (lacs)
Source of Fund
Share Capital
Share capital (25 pens per share)
20 Share premium
Profit and loss account
Current Liabilities
Creditors due within one year
Creditors due more than one year
Total
Application of Funds
A) Tangible assets
Freehold land and building
Long leasehold property
plant and equipment
fixtures and fitting
B) Intangible assets
Programme rights
Investment
C) Current assets
Film rights
Programme stocks
Debtors
short term deposits
cash at hand and in bank
Total
MET’S Institute of
Management
25,862
4,093
151,237
126,042
18,001
Amount (lacs)
181,192
144,043
325,235
5,842
28,193
21,541
4,507
60,083
3,080
37,909
40,989
48,750
27,356
89,114
47,605
11,338
224,163
325,235
Business Valuation

21. Net Asset Value
21
1
Freehold land and building
5,842
2
Long leasehold property
28,193
3
Plant and equipment
21,541
4
Fixtures and fitting
4,507
5
Programme rights
3,080
6
Investment
37,909
7
Film rights
48,750
8
Programme stocks
27,356
9
Debtors
89,114
10
Short term deposits
47,605
11
Cash at hand and in bank
11,338
12
Less: Creditors due more than one year
(18,001)
307,234
MET’S Institute of
Management
Business Valuation

22. 22
Net Asset Value 3,07,234 Lakhs
Net Enterprise Value 3,07,234
Lakhs
MET’S Institute of
Management
Business Valuation

23. Presented by
23
Sr. No. Name
R No.
oll
1
ANSHARI NAWED ABDUL VAHID
61
2
ATTRA GURUDEV RAVINDERSINGH
62
3
COUTINHO JOHN PETER
63
4
JAIN ASHISH GANPATHLAL
74
5
KHAN DANISH WAHID
80
6
RAO SWETA SUNDER
105
MET’S Institute of
Management
Business Valuation