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Valuation of business
- 1. VALUATION
OF BUSINESS
Rajkumar S. Adukia
093230 61049 / 093221 39642
rajkumarfca@gmail.com
http://www.carajkumarradukia.com
- 2. 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.
© Rajkumar Adukia 2
- 3. 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
© Rajkumar Adukia 3
- 4. 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
© Rajkumar Adukia 4
- 5. Value to whom?
Descendents
Prospective Buyer
Partners
Employees
Investors
Sellers
© Rajkumar Adukia 5
- 6. 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
© Rajkumar Adukia 6
- 7. 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
© Rajkumar Adukia 7
- 9. Steps in Valuation process
Engagement of expert
Research and data gathering
Analysis and estimate of value
Reporting Process
© Rajkumar Adukia 9
- 11. 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
© Rajkumar Adukia 11
- 12. 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.
© Rajkumar Adukia 12
- 13. 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
© Rajkumar Adukia 13
- 14. 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.
© Rajkumar Adukia 14
- 16. 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
© Rajkumar Adukia 16
- 17. 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
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- 18. Resources required
1. Business valuation publications
2. Industry information
3. Economic data
4. Market transaction data
5. Other resources
© Rajkumar Adukia 18
- 19. 1. Business valuation publications
General Business Valuation
Transaction Data
Industry-Specific Valuation
Cost of Capital
Professional Practice Valuation
Partnership Valuation
ESOP Valuation
© Rajkumar Adukia 19
- 20. Business valuation
publications…
Mergers & Acquisitions Valuation
Intangible Assets Valuation
Sample Valuation Reports
Financial Reporting Valuation
Valuation Software Technology Valuation
Real Estate Valuation etc.
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- 21. 2. Industry information
Industry overview
Issues
Trends & outlook
Financial ratios and benchmarking
Compensation and salary structure
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- 22. 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
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- 23. 5. Other resources
Business valuation multiples (derived from
company merger and acquisition transaction
data)
Legal and tax resources
Tax regulations
Case laws
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- 25. Valuation process
Decide on business valuation method to be used
Analyze the company information in conjunction
with the industry and comparable company data.
© Rajkumar Adukia 25
- 26. Business Valuation Methods
1. Book value-based on books of accounts
2. 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
© Rajkumar Adukia 26
- 27. Business Valuation Methods…
3. 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).
4. 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 .
© Rajkumar Adukia 27
- 28. Business Valuation Methods …
5. 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
6. 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. 28
© Rajkumar Adukia
- 29. Business Valuation
Methods …
7. True value or market value: It is the amount that
a buyer is finally willing to pay
8. Dividend Capitalization: Determine dividend
paying capacity of a business
9. Sales Multiple Business Valuation: Widely used
method. Annual sales multiplied by industry
multiplier ( Obtain from financial publications or
comparable business)
© Rajkumar Adukia 29
- 30. Business Valuation
Methods …
10. Profit Multiple Business Valuation: Another widely
used method. Pre tax profits multiplied by industry
multiplier
11. 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
© Rajkumar Adukia 30
- 32. 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
© Rajkumar Adukia 32
- 33. 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
© Rajkumar Adukia 33
- 34. Valuation Reports
Limited Scope Valuations
Formal Valuations
Mergers and Acquisitions
Comprehensive valuations
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- 35. 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
© Rajkumar Adukia 35
- 36. 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
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- 37. 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.
© Rajkumar Adukia 37
- 39. 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
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- 40. 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.
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- 41. Tax concerns
Structuring the Sale-Structure to minimise tax
liability
Structuring the company
Sale of assets or sale of stock
Reporting the sale
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- 42. Valuation is an art, market
driven, and subject to
negotiation
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- 43. 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
© Rajkumar Adukia 43