gkc valuation report
TRANSCRIPT
- GKC PROJECTS LIMITED
SBML Business Appraisals
Table of Contents
Description of the Appraisal
Assignment ...............................................6
Standard and Premise of
Value ..............................................................6
Scope of the
Report .............................................................................. 6
Information
Sources ..............................................................................7
Important
Note ......................................................................................7
Business
Description ..............................................................................8
Company Profile
………............................................................................8
Services ..............................................................................................
...9
Industry
Overview................................................................................10
Business of
Prestressing.......................................................................11
Financial Statement
Reconstruction......................................................16
Business Valuation Approaches and
Methods .......................................18
Asset-Based Business
Valuation...........................................................18
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Market-Based Business
Valuation.........................................................19
Income-Based Business
Valuation........................................................19
Asset-Based Business Valuation
Results ..............................................21
Income-Based Business Valuation
Results............................................22
Conclusion of Business
Value ...............................................................26
Statement of Limiting
Conditions .........................................................27
Certification of the
Valuers...................................................................30
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Special Thanks
Our special thanks to all the Committee Members of the Institute of
Chartered Accountants of India who have designed this course for the
benefit of the Profession and Society at large, for giving us the
opportunity to prepare this case study, all the resource persons for
their dedicated and unstinted support in teaching the subject and
guiding us through all the shades of the subject, to all the office
bearers of the Institute for their untiring efforts in making the
course/class so interesting, to all the colleagues at the valuations batch
to be so inspiring and friendly and finally but not the least to the ICAI
for creating all the above persons
Team SBML
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Re: Appraisal of ABCD Prestressing Systems Private Limited
Dear Mr. K. Suresh Reddy, SR Nagar, Hyderabad
We have been engaged to estimate the fair market value of the business
enterprise known as ABCD Prestressing Systems Private Limited as of December
31, 2010 for the purpose of offering the subject business for sale. At your request
we have provided a restricted use limited appraisal report, which is advisory in
nature and intended to be used for offering the subject business for sale. Please
refer to the statement of limiting conditions contained in the report.
For the purposes of business appraisal, fair market value is defined as the
expected price at which the subject business would change hands between a
willing buyer and a willing seller, neither being under a compulsion to conclude
the transaction and both having full knowledge of all the relevant facts.
We have appraised a fully marketable, controlling ownership interest in the
assets of the subject business. The appraisal was performed under the premise
of value in continued use as a going concern business enterprise. In our opinion
this premise of value represents the highest and best use of the subject business
assets.
Based on the information contained in the report that follows, it is our estimate
that the fair market value of ABCD Prestressing Systems Private Limited is:
Business Enterprise Value:
The Business Enterprise Value includes inventory, furniture, fixtures and
equipment, and all intangible assets, including business goodwill. It excludes
cash, or cash equivalents, accounts receivable, real estate, non-operating assets
and all business liabilities. The valuation is subject to the information provided to
us as well as the assumptions and financial data which appear in the report.
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We have no obligation to update this report or our conclusion of value for
information that comes to our attention after the date of this report.
We have appraised the subject business in accordance with the Uniform
Standards of Professional Appraisal Practice (USPAP) as promulgated by the
Appraisal Foundation and the International Valuation Standards (IVS) published
by the International Valuation Standards Council.
This business appraisal follows the requirements of a valuation engagement.
Sincerely,
For SBML Business Valuers
Authorized Signatory
Place: HyderabadDate: January 21, 2011
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Description of the Appraisal Assignment
SBML Business Valuers has been retained by Mr. K. Suresh Reddy to estimate the
fair market value of ABCD Prestressing Systems Private Limited on a marketable,
controlling ownership basis as of December 31, 2010.
The purpose of this appraisal is solely to provide an independent valuation
opinion in order to assist Mr. K. Suresh Reddy in offering the subject business for
sale. As such, this appraisal report is intended for use by Mr. K. Suresh Reddy
only.
This valuation engagement was conducted in accordance with the International
Valuation Standards. The estimate of business value that results from this
valuation engagement is expressed as a conclusion of business value, elsewhere
in this Detailed Report.
Standard and Premise of Value
This appraisal report relies upon the use of fair market value as the standard of
value. For the purposes of this appraisal, fair market value is defined as the
expected price at which the subject business would change hands between a
willing buyer and a willing seller, neither being under a compulsion to conclude
the transaction and both having full knowledge of all the relevant facts.
This is essentially identical to the market value basis as it is defined under the
International Valuation Standards.
The appraisal was performed under the premise of value in continued use as a
going concern business enterprise. In our opinion this premise of value
represents the highest and best use of the subject business assets.
Scope of the Report
This appraisal report is performed on a limited scope basis, as it is mentioned in
engagement letter. Specifically, the report is not a self contained comprehensive
valuation report.
We have conducted a site review of the subject business premises, but we have
not audited or otherwise reviewed the business financial statements, which have
been provided by the business management and its financial advisors. It was
assumed that these financial statements are true and accurate.
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Information Sources
The following sources of information were used in preparing the appraisal:
1. We conducted interviews with the ABCD management team.
2. National, regional and local economic data were compiled and reviewed. The sources used include the websites of/at Google, NSE, BSE, information from leading dailies and their websites, subject company website, etc.
3. Research of comparative business sale transaction data has been performed. This included data compilation from the website of Registrar of Companies for the subject competitive company. The transactional data, however, is not included in this report.
4. We have computed the cost of capital from the data provided by the subject company. This data were used in estimating the appropriate discount and capitalization rates. Computation table is annexed hereto.
5. Business financial statements and tax records of the subject business over the most recent 3 years have been analyzed to estimate the business current performance and outlook for continued income generation.
6. Financial statements, including the company historic Income Statements and Balance Sheets, have been reconstructed / normalized to determine the business earning power and provide inputs for the selected business valuation methods.
Important / Please note:
1. This case study being part of the curriculum on the valuations
course, we have changed the name of the subject company to
protect its privacy.
2. We thankfully acknowledge to have obtained/utilized relevant
necessary information / data / modules / formats, etc from the
public domain / text books / Course material, resource persons’
presentations, etc. in preparation of this case study - report.
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Business Valuation of ABC Projects Limited
Valuation – A Case Study / Project Study
The valuation of the company derive its strength from proven track record, wide
recognition in pre-stressing segment, diversified end user base, steady industry
growth prospects in the medium term, very low gearing levels and support
drawn from the local industry.
The valuations of the company are however constrained by small size of
operations, low profitability margins due to subcontracting nature of business,
and inherent risks associated with the construction industry that it operates in.
Ability of company to secure new and large orders and attain better profitability
levels remain key valuation sensitivities.
Business Description
Fast growing Indian economy is bringing considerable changes in life style.
Spending power has increased many folds in recent years. Shopping, touring,
dining, etc has become hobby rather than necessity for most. This trend
demands for more commercial complexes, multiplexes, hotels, etc.
Recent architecture in building circulation demands for more column free area,
at the same time restriction imposed in building heights by authorities demands
for shallow beam depths / slab thickness. Meeting these demands in
conventional RCC design is proved to be not viable and uneconomical.
Company Profile
The ABCD Prestressing Systems Private Limited (ABCD) was incorporated in the
year 2005. ABCD was the second company in the state, to introduce ‘STATE-OF-
THE ART’ pre-stressing technology and started its operation with the
implementation of Pre-stressing Anchorages and Equipments in the construction
industry. It has completed pre-stressed projects beyond 350 structures across
the state. By virtue of specialized civil engineering works, the company has been
recognized as a ‘Specialised Civil Structural Engineering Firm’. The company is
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spear headed by Mr. K. Suresh Reddy (MD), and Mr. KNC Chandrasekhar, Whole-
time Director. The company has well experienced and technically qualified
personnel overlooking the key functions of the company.
Services:
The main activities of the company evolve around design implementation of
prestressing system in Building and civil works. With strong technical staff
backing, the company offers value added engineering services to both
consultants and contractors.
Being a structural design and build specialist with particular emphasis in
buildability and cost optimization, the company is well placed to provide services
ranging from feasibility study, design and construction of building and civil
engineering structures.
The company gathers significant support from local industry and property
developers in terms of business operations. ABCD operates in the business of
pre-stressing, repairs and rehabilitation of old structures, flat slab and new
construction. Generally the pre-stressing work is awarded to ABCD through the
main contractors, developers and owners. Rehabilitation works are normally
awarded by the Government. Roads and Railway bridges are owned by Public
Works Department and Indian railways respectively. As on December 31, 2010,
the balance order book position of the company stood at Rs 2150.00 Lacs which
represents 1.87x sales of FY10, from 115 jobs aggregating to contract value of
Rs 1150.00 Lacs.
Pre-stressing by nature is a very small component in the total construction or
civil works of any structure. As a result the margins under pre-stressing are very
low. Steel and cement constitute the main raw materials for most projects. Of
late due to growing scale of business operations and improvement in its
bargaining power, ABCD has been reportedly able to bag large and reputed
contracts at star rates which shall enable ABCD to protect its margins.
The Managing Director of the company is a technocrat having more than 23
years of experience in India and abroad in the relevant field before launching this
company. As such the company is in a very good position to procure orders
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straightaway because of his contacts and experience in the industry, especially
Commercial buildings, IT Parks, Industrial Buildings, residential Buildings, etc.
Going forward, company expects the nature of orders will not only vary from
routine pre-stressing jobs but also extend to rock anchors, commercial buildings,
slope stabilization and hydel power projects amongst others.
Industry
Pre-stressing activity is an essential requirement of the major construction
activities related to infrastructure development. It cannot be viewed in isolation
and has to be considered in sync with the growth prospects of the construction
industry. Construction is the second largest economic activity in the country. The
sector accounts for about 5% of GDP. It is the second biggest contributor and the
second highest employer after agriculture. As development of infrastructure is a
key for growth, Central, State and Local Governments are undertaking various
projects by direct funding as well as through Public Private Partnership (PPP) in
the area of roads & highways, ports, power, water and sewage facilities. As per
the reports submitted by various working groups for XI Five Year Plan a total
investment of Rs 10,29,600 Crore is planned in various sectors of infrastructure
as compared to the planned investment of Rs 6,18,800 Crore during X five year
plan.
The order book of the construction companies is expected to remain robust
considering the thrust on infrastructure by the government. The execution of
robust order book position would require huge capital either in the form of debt
or equity. In current scenario of high interest rates and low profitability, increase
in leverage will put pressure on margins. On the other hand, further equity issue
would dilute the earnings which may not be liked by the shareholders.
For players like ABCD the future plans of the company to diversify into other
related areas of construction so as to maximize its foothold and provide stability
in the industry.
The Business of Pre-stressing:
Pre-stressing is the deliberate creation of internal stresses in a structure or
system to improve its performance. A pre-stressed concrete member is one in
which there have been introduced internal stresses of such a magnitude, and
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also distribution, that the stresses resulting from external loading are
counteracted to a desired degree.
The Pre-stress in a structure is influenced by either of the two processes:
1. Pre-tensioning, and
2. Post-tensioning
Pre-tensioning can be further classified into two categories:
1. Linear pre-tensioning
2. Circular pre-tensioning
PRE-TENSIONING
Pre-tensioning is accomplished by stressing wires or strands, called tendons, to
predetermined amount by stretching them between two anchorages prior to
placing concrete as shown in fig.1. The concrete is then placed and tendons
become bounded to concrete throughout their length. After concrete has
hardened, the tendons are released by cutting them at the anchorages. The
tendons tend to regain their original length by shortening and in this process
transfer through bond a compressive stress to the concrete. The tendons are
usually stressed by the use of hydraulic jacks. The stress in tendons is
maintained during the placing and curing of concrete by anchoring the ends of
the tendons to abutments that may be as much as 200m apart. The abutments
and other formwork used in this procedure are called prestressing bench or bed.
Hoyer System or Long Line Method is often adopted in pre-tensioning. Two bulk
heads or abutments independently anchored to the ground are provided several
meters apart, say 200 meters, wires are stretched between the bulkheads.
Moulds are place enclosing the wires. Concrete is placed surrounding the wires.
With this Hoyer System, several members can be produced along one line. This
method is economical and is used in almost all pre-tensioning factories. For,
tensioning, a hydraulic jack is used. Wires are gripped at the bulkheads, using
split-cone wedges. These wedges are made from tapered conical pins. Flat
surface of the pin carries serrations to grip the wire.
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There is another pre-tensioning method known as Shorer system. In this system
a central tube of high strength steel carries the prestress from surrounding wires
and the entire assembly is placed in position and concreted. After the concrete
has attained sufficient strength, the tube is removed and the prestress is
transferred to concrete thorough bond. The hole left by the tube is grouted.
POST-TENSIONING
A metal tube or a flexible hose following intended profile is placed inside the
mould and concrete is laid. Flexible hose is then removed leaving a duct inside
the member. Steel cable is inserted in the duct. The cable is anchored at one end
of the member and stretched using a hydraulic jack at the other end. After
stretching the cable is anchored at the other end also. Therefore post tensioning
system consists of end anchorage and jacks. The popular post tensioning
systems are the following:
1. Frevssinet System
2. Magnel Blatton System
3. Gifford-Udall System
4. Lee-McCall System
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OTHER METHODS OF PRESTRESSING
A) ELECTRICAL PRESTRESSING:
In this method reinforcing bars are coated with thermoplastic material
such as sulphur or low melting ally and buried in the concrete. After the
concrete is set, electric current of low voltage but high amperage is
passed through the bar. Electric current heats the bar and the bar
elongates. Bars provided with threads at the other end are tightened
against the heavy washers, after required elongation is obtained. When
the bar cools, prestress develops and the bond is restored by
resolidification of the coating.
B) CHEMICAL PRESTRESSING:
Chemical prestressing is done using expanding cement. Prestressing
can be applied by embedding steel in concrete made up of expanding
cement. Steel is elongated by the expansion of the concrete and thus
gets prestressed. Steel in turn produces compressive stress in
concrete.
ADVANTAGES OF PT SLABS
Post tensioning is a method of reinforcing concrete with high strength steel
strands or bars typically referred to tendons. Post tensioning applications include
all types of building (Commercial, Industrial, residential, parking, etc), Bridges,
water tanks, rock and soil anchors, etc.
In conventional concrete construction if the load is applied to a slab or beam,
they tend to deflect or sag. This deflection will cause the bottom fiber of slab or
beam to elongate slightly. Even a slight elongation is usually enough to cause
cracking as concrete is weak in tension. Reinforcement is typically embedded in
the concrete as tensile reinforcement to limit the crack width. This reinforcement
what is called passive reinforcement does not carry any force until the beam or
slab deflect enough to crack.
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Post tensioning tendons on the other hand are considered active reinforcing.
Because it is prestressed, the tendon is effective as reinforcement even before
the concrete is cracking.
PT Structures can be designed to have minimum deflection and can be designed
for un-cracked structure even under full loading conditions depending on its class
of design.
Speedier Construction: Due to simplified structure layout of floor, and reduced
materials used, construction can be carried out faster. Time saving is derived
most notably from the simplified centering and the reduced quantum of steel.
The cycle time is reduced drastically.
Improved deflection: PT Slab tends to arch slightly after stressing of tendons
due to its balancing load action. This will help to reduce the overall downward
deflection of floor slab and in turn help to alleviate the long term deflection
problems especially for long span structures and long cantilevers.
Greater headroom: Due to the more efficient design concept of Post
tensioning, PT Structures are generally thinner as compared to RCC Design.
Neat and simplified layout: For large spans, RCC Design would generally
adopt beams framing system. This could be substituted with PT Flat slab or
banded slab system which are very friendly for construction and fixing of service.
Cost consideration: for large span structures, and for commercial / industrial
loading, PT Is proving to be economical. Direct cost saving with PT Design
approximately varies from 10% to 15%. Savings in column and foundation design
due to less self weight, saving due to reduced plastering area for ceiling, saving
due to reduced floor heights as the overall building height reduce, etc is not
considered in the above percentages of savings.
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DISADVANTAGES OF PRESTRESSED CONCRETE
1. It requires high quality dense concrete of high strength. Perfect quality
concrete in production, placement and compaction is required.
2. It requires high tensile steel, which is almost three times costlier than the
mild steel.
3. It requires complicated tensioning equipment and anchoring devices,
which are usually covered under patented rights.
4. Construction requires perfect supervision at all the stages of construction.
LOSSES IN PRESTRESS OF PRESTRESSED CONCRETE
The force which is used to stretch the wire to the required length must be
available all the time as prestressing force if the steel is to be prevented from
contracting. Contraction of steel wire occurs due to several causes, effecting
reduction in the prestress. This reduction in the prestressing force is called loss
in prestress. In a prestressed concrete beam, the loss is due to the following:
a) Elastic shortening
b) Shrinkage of concrete
c) Creep of concrete
d) Frictional loss
e) Relaxation of steel
f) Anchorage take-up
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RECONSTRUCTION AND FORECASTS
Accurate estimation of business value depends upon the subject business
financial performance. While historical financials are important, business value
relies upon the ability of the business to continue producing desired economic
benefits for its owners.
Many closely held companies are managed to minimize taxable income. To
determine the business value accurately, the company's historic financial
statements, such as its Income Statements and Balance Sheets, generally
require certain adjustments. The summary of the most recent annual historic
Income Statements and the appropriate adjustments are summarized in the
table below:
NORMALIZED PROFIT & LOSS ACCOUNT
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Particulars 2009 2010Gross Revenues 976.96 1153.91Less returns and discounts 0.00 0.00Net Sales 976.96 1153.91Cost of Goods Sold (COGS) 594.07 648.02Gross Profit 382.89 505.89Operating Expenses 269.82 338.87Operating Income 0.00 0.00Other income / (expenses) 0.00 1.70Net Pre-Tax Income 113.07 168.72Taxes 31.57 38.71Net Income 81.50 130.01
Adjustments Depreciation and Amortization expense
9.53 14.64
Interest expense 0.73 0.52Non-recurring expenses – Bad Debts 4.21 21.61Non-operating expenses / (income) – Donations
0.00 3.71
Seller's Discretionary Cash Flow 95.97 170.49EBITDA 81.50 129.12Changes in working capital 18.69 59.82Capital investments 11.23 28.03Dividend payouts / Partner Draws 12.00 39.60Free Cash Flow 39.58 43.04Growth in % in Net Cash Flow 2.88 8.74Average Growth Rate in NCF N.A. 5.81
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NORMALIZED BALANCE SHEET
Balance Sheet Items Actuals AdjustmentsAdjuste
dAssets
Current Assets Cash 28.86 -20.00 8.86Accounts receivable 213.32 21.33 234.65Investments 12.50 0.00 12.50Deposits 89.93 0.00 89.93Inventory 45.03 4.50 49.53Total Current Assets 389.64 395.48
Fixed Assets Tangible Fixed Assets
Furniture and fixtures 12.30 3.47 15.77Computers 14.08 9.66 23.74Equipment 17.25 3.63 20.88Plant & Machinery 24.63 6.38 31.01Vehicles 41.45 15.22 56.67Total Tangible Fixed Assets 109.71 38.36 148.07
Intangible Fixed Assets Software 1.33 0.12 0.00Total Intangible Fixed Assets 1.33 0.12 0.00Total Fixed Assets 111.04 38.48 148.07Less: Acc. Depreciation 38.48 0.00Net Fixed Assets 72.56 148.07
Total Assets 462.20 543.55Liabilities
Current Liabilities Accounts payable 185.92 185.92Taxes payable 49.48 0.52 50.00ST portion of long-term debt 0.00 3.60 3.60Total Current Liabilities 235.40 239.52
Long-Term Liabilities Bank Loan for Vehicles 14.09 -3.60 10.49Shareholders' Loan 2.64 0.00 2.64
Total Long-Term Liabilities 16.73 13.13Total Liabilities 252.13 252.13Net Worth 210.07 291.42
The objective of these adjustments is to reconstruct the historic financial
statements in order to reveal the true economic potential and earning power of
the subject business.
All financial values incorporated in this Report are Indian Rupees in Lacs.
Business Valuation Approaches and Methods
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There are three fundamental ways to measure the value of a business or
professional practice:
Asset approach
Market approach
Income approach
Under each approach, a number of methods are available which can be used to
determine the value of a business enterprise. Each business valuation method
uses a specific procedure to calculate the business value.
No one business valuation approach or method is definitive. Hence, it is common
practice to use a number of business valuation methods under each approach.
The business value then is determined by reconciling the results obtained from
the selected methods. Typically, a weight is assigned to the result of each
business valuation method. Finally, the sum of the weighted results is used to
determine the value of the subject business.
This process of concluding the business value is referred to as the business value
synthesis.
Asset Approach
The asset approach to business valuation considers the underlying business
assets in order to estimate the value of the overall business enterprise. This
approach relies upon the economic principle of substitution and seeks to
estimate the costs of re-creating a business of equal economic utility, i.e. a
business that can produce the same returns for its owners as the subject
business.
The business valuation methods under the Asset Approach include:
Asset accumulation method.
Capitalized excess earnings method.
For the subject company, being less capital intensive, Asset accumulation
method cannot be used for the purposes of valuation. Hence we have taken
excess earnings method for the purposes of computation.
Market Approach
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Under the Market Approach to business valuation, one consults the market place
for indications of business value. Most commonly, sales of similar businesses are
studied to collect comparative evidence that can be used to estimate the value
of the subject business. This approach uses the economic principle of
competition which seeks to estimate the value of a business in comparison to
similar businesses whose value has been recently established by the market.
The business valuation methods under the Market Approach are:
Comparative private company transaction method.
Comparative publicly traded company transaction method.
We could not get the data of sale / purchase of the companies similar to the
subject company in the recent past, hence market approach of valuation is not
considered in this report.
Income Approach
The Income Approach to business valuation uses the economic principle of
expectation to determine the value of a business. To do so, one estimates the
future returns the business owners can expect to receive from the subject
business. These returns are then matched against the risk associated with
receiving them fully and on time.
The returns are estimated as either a single value or a stream of income
expected to be received by the business owners in the future. The risk is then
quantified by means of the so-called capitalization or discount rates.
The methods which rely upon a single measure of business earnings are referred
to as direct capitalization methods. Those methods that utilize a stream of
income are known as the discounting methods. The discounting methods
account for the time value of money directly and determine the value of the
business enterprise as the present value of the projected income stream.
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The methods under the Income Approach include:
Discounted Cash Flow Method.
It is a method within the income approach whereby the present value of
future expected economic benefits is calculated using a discount rate.
Multiple of Discretionary Cash Flow Method
It is a method within the income approach whereby the earnings of the
subject company is multiplied by a number of times the company is
expected of the earnings.
Capitalization of Earnings Method
In this method the earnings of the company is inversely multiplied by the
Discount Factor (Preferably) to arrive at the market value of the company.
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Asset-Based Business Valuation Results
To estimate the value of the subject business under the Asset Approach, this
report uses the Capitalized Excess Earnings Method. The method works to
determine the business value as the sum of the following:
1. The fair market value of the business net tangible assets.
2. Business goodwill.
For the purposes of this report, the net tangible assets are determined as the
difference between the total assets of the business and its current liabilities.
Business goodwill is calculated by capitalizing the value of business “excess
earnings”. Excess earnings are the difference between the business Net Cash
Flow and a fair return on the net tangible assets. We use the discount rate as the
proxy for this fair rate of return. The equity discount rate is calculated by the
Build-Up Procedure as follows:
Risk-free rate of return 6.00% Current Bank Fixed Deposits yield is used. Premium for regional/ political cause
10.00% Risk premium for operating in Hyderabad- Telangana agitation hampering growth.
Premium for small company size
5.00% Risk premium for investing in a small company.
Industry-specific risk premium
1.00% Technical Consulting / Services provider
Company-specific risk premium
2.50% Company-specific risk premium.
Equity Discount Rate
24.50% Sum of the risk-free return plus the risk premia above.
Net Cash Flow Growth Rate
5.81% Long-term growth rate in subject business Net Cash Flow.
Capitalization Rate 18.69% Difference between the Equity Discount Rate and NCF Growth Rate above.
The Fair Market Value of the Assets of the Company
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Capitalized Excess Earnings Method
Step # I:
Computation of Goodwill of the Company INR in Lacs
A Business Net Cash Flow 144.65B Net Tangible Assets 543.55C Fair Return on Net Tangible Assets (@ 20%) 108.71D Excess Earnings (A – C) 35.94E Multiplier Factor (Assumed excess earnings @ 5 Years) 5F Goodwill (D multiplied by E) 179.70
Step # II:
Computation of Business Value of the Company INR in Lacs
A Gross Tangible Assets of the Company 543.55B Less: Current Liabilities & Provisions 239.52C Net Tangible Assets of the Company 304.03D Goodwill of the Company as computed supra 179.70E Business Value of the Company 483.73
Earnings Basis used for Business Valuation
Small business valuation generally relies upon some measure of business cash
flows as the earnings basis. The most commonly used earnings basis measures
include:
Seller's Discretionary Cash Flow (SDCF)
Net Cash Flow
Seller's Discretionary Cash Flow
A widely accepted definition of SDCF is:
1. Pre-tax business net profit.
2. Plus total compensation of a single owner-operator.
3. Plus adjustment of all other working owners' compensation to market rate
(manager replacement).
4. Plus annual depreciation and amortization expense.
5. Plus interest expense.
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6. Plus non-recurring expenses.
7. Plus expenses not related to the business operations.
This is also referred to as the Seller's Discretionary Earnings (SDE).
Valuation of the company as per SDCF Method
Computation of Business Valuation of the Company INR in Lacs
A Sellers’ Discretionary Cash Flow 144.65
B Multiplier Factor (Assumed for the first 10 Years) 10
C Multiplier Factor (Assumed for the latter 10 Years) 5
D Multiplied Value for the first 10 Years 1446.50
E Multiplied Value for the latter 10 Years 723.25
F Business Value of the Company 2169.75
Capitalization of Net Free Cash Flow Method
Net cash flow is defined as follows:
1. After-tax business net profit.
2. Plus depreciation and amortization expense.
3. Plus decreases in working capital.
4. Plus tax-affected interest expense.
5. Plus preferred dividend payouts.
6. Less annual capital expenditures.
Valuation of the company as per NCF Method
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Computation of Business Valuation of the Company INR in Lacs
A Net Free Cash Flow 43.04
B Multiplier Factor (Assumed for the first 10 Years) 10
C Multiplier Factor (Assumed for the latter 10 Years) 5
D Multiplied Value for the first 10 Years 430.04
E Multiplied Value for the latter 10 Years 215.02
F Business Value of the Company 645.06
Capitalization of Earnings Method
A EBITDA 129.12
B Division Factor (Assumed @ Cost of Capital @ 18.69%) 18.69%
C Business Value of the Company (A multiplied by
B)
690.85
Discounted Cash Flow Method
Conceptual Basis
The discounted cash flows analysis is an income method to valuation wherein the
total fair market value of the business entity is calculated by discounting
projected future cash flows back to the date of valuation. At the end of the
projection period, a residual or terminal value is calculated and discounted to its
present value at the date of valuation. The theory behind the discounted cash
flows method is that an entity's value is equal to the present value of its
expected future cash flows. It is used primarily when a business's short-term
growth of the projected earnings stream is not expected to equal its expected
long term growth rate and when a business's earnings and/or cash flows are the
primary factors of value.
The steps involved in a discounted cash flows analysis are as follows:
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1. Develop the pro-forma ongoing capacity base to be used for the projected
cash flows.
2. Develop the method to be used to project future earnings or cash flows.
3. Develop a risk adjusted discount rate.
4. Discount to the date of valuation the projected cash flow streams using the
discount rate.
5. Capitalize the terminal year's projected income into a residual value using the
discount rate less the terminal growth rate.
6. Discount the residual value to its present value as of the date of valuation.
7. Sum the present values of the discounted cash flows and residual value.
8. Adjust for non-operating assets and/or liabilities, premiums and discounts to
determine the fair market value for the entity at the date of valuation.
Pro-Forma Base
In order to estimate the business's fair market value using the discounted cash
flows method, it is necessary to determine the subject company’s cash flow base
as of the date of valuation. It is done by adjusting the historical income
statements to a normalized state, was completed in a previous section of this
appraisal report.
Selection of an Appropriate Discount Rate
Discount rates vary among particular types of businesses and from one
period of time to another.
Discount rates are expressed as a percentage and represent the risk of
receiving the benefit stream over time. The more speculative or higher the
risk, the higher the discount rate; conversely, the less speculative or lower
the risk, the lower the discount rate.
The built up of the discount rate was completed in a previous section of
this appraisal report.
Business Valuation using Discounted Cash Flow Method
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A Present Value of the Future Cash Flows of the Company 2374.00
B Number of Equity Shares Outstanding 500000
C Value of the one Equity Share of the Company 475.00
D Business Value of the Company (Rounded off to) 2375.00
Conclusion of Business Value
We relied upon the aforementioned methods under the Asset, Market and
Income Approaches to business valuation. The following table provides the
summary of the various methods used to value the business of the company. We
have taken equal weights to average the various methods as the subject
company is a small sized private limited company having its own advantages
and dis-advantages in marketing the company:
Valuation Method Approach Value Weight Weighted Value
Capitalized Excess Earnings Asset
483.73 20% 96.75
Seller’s Discretionary Cash Flow Income 2169.75 20% 433.95
Multiple of Net Cash Flow Income 645.06 20% 129.01
Discounted Cash Flow Income 2374.00 20% 475.00
Capitalized Earnings Income 690.85 20% 138.17
Indicated Business Value 1272.88
INDICATED BUSINESS VALUE: Rs. 1272.88 LACS
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Statement of Limiting Conditions
This business valuation / appraisal is done relying upon the following contingent and limiting conditions:
1. We assume no responsibility for the legal matters including, but not limited to, legal or title concerns. Title to all subject business assets is assumed good and marketable.
2. All information provided by the client and others is thought to be accurate. However, we offer no assurance as to its accuracy.
3. Unless stated otherwise in this report, we have assumed compliance with the applicable Central, State and Local laws and regulations.
4. Unless otherwise stated to the contrary, we have assumed that no hazardous conditions or materials exist which could affect the subject business or its assets. However, we are not qualified to establish the absence of such conditions or materials, nor do we assume the responsibility for discovering the same.
5. As per the engagement agreement with the client, this appraisal report is limited in scope for the purposes stated in the engagement letter. Not all pertinent information has been considered nor was a comprehensive valuation undertaken. This may have an effect on the value conclusions presented in this report.
6. This report may not fully disclose all the information sources, discussions and business valuation methodologies used to reach the conclusion of value. Supporting information concerning this report is on file with the business appraiser.
7. The opinion of value expressed in this report does not obligate us to render a comprehensive business appraisal report, to give testimony, or attend court proceedings with regard to the subject business assets, properties or business interests, unless such arrangements have been made previously.
8. This report is valid only for the date specified herein.
9. Financial statements and other related information provided by the business or its representatives, in the course of this engagement, have been accepted without any verification as fully and correctly reflecting the enterprise’s business conditions and operating results for the respective periods, except as specifically noted herein.
10.We have not audited, reviewed, or compiled the financial information provided to us and, accordingly, we express no audit opinion or any other form of assurance on this information.
11.Public information and industry and statistical information have been obtained from the sources we believe to be reliable. However, we make no
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representation as to the accuracy or completeness of such information and have performed no procedures to corroborate the information.
12.We do not provide assurance on the achievability of the results forecasted by or for the subject company because events and circumstances frequently do not occur as expected; differences between actual and expected results may be material; and achievement of the forecasted results is dependent on actions, plans, and assumptions of management.
13.The calculation of value arrived at herein is based on the assumption that the current level of management expertise and effectiveness would continue to be maintained, and that the character and integrity of the enterprise through any sale, reorganization, exchange, or diminution of the owners’ participation would not be materially or significantly changed.
14.This report and the calculation of value arrived at herein are for the exclusive use of our client for the sole and specific purposes as noted herein. They may not be used for any other purpose or by any other party for any purpose. Furthermore the report and calculation of value are not intended by the author and should not be construed by the reader to be investment advice in any manner whatsoever. The calculation of value represents the considered opinion of the appraisers based on limited information furnished to them by the subject company and other sources.
15.Neither all nor any part of the contents of this report (especially the calculation of value, the identity of any valuation specialist(s), or the firm with which such valuation specialists are connected or any reference to any of their professional designations) should be disseminated to the public through advertising media, public relations, news media, sales media, mail, direct transmittal, or any other means of communication without the prior written consent and approval of SBML.
16.Except as noted, we have relied on the representations of the owners, management, and other third parties concerning the value and useful condition of all equipment, real estate, investments used in the business, and any other assets or liabilities, except as specifically stated to the contrary in this report. We have not attempted to confirm whether or not all assets of the business are free and clear of liens and encumbrances or that the entity has good title to all assets.
17.Possession of this report, or a copy thereof, does not carry with it the right of publication of all or part of it, nor may it be used for any purpose without the previous written consent of the appraiser, and in any event only with proper authorization. No part of this report is to be communicated to the public by means of advertising, news releases, sales and promotions or any other media without a prior written consent and
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approval by us. Authorized copies of this report will be signed in blue ink by a partner of SBML.
Place: HyderabadDate: January 21, 2011
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Certification of the Valuers
We certify that, to the best of our knowledge and belief:
1. The statements of fact contained in this report are true and correct.
2. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions and are our personal, impartial, and unbiased professional analyses, opinions, and conclusions.
3. We have no (or the specified) present or prospective interest in the property that is the subject of this report, and that we have no (or the specified) personal interest with respect to the parties involved.
4. We have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment.
5. Our engagement in this assignment was not contingent upon developing or reporting predetermined results.
6. Our compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favours the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal.
Place: HyderabadDate: January 21, 2011
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