valuation of business

Rajkumar S. AdukiaRajkumar S. Adukia 093230 61049 / 093221 39642 093230 61049 / 093221 [email protected] [email protected]

http://www.carajkumarradukia.comhttp://www.carajkumarradukia.com

VALUATION OF BUSINESS

© Rajkumar Adukia 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.


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 ? 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


Sellers

Prospective Buyer

Investors

Descendents

Partners

Employees

Value to whom?


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 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


VALUATION PROCESS


Steps in Valuation process

Engagement of expert Research and data gathering Analysis and estimate of value Reporting Process


ENGAGEMENT OF 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

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 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 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.


RESEARCH AND DATA GATHERING


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

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

1. Business valuation publications

2. Industry information

3. Economic data

4. Market transaction data

5. Other resources


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…

Mergers & Acquisitions Valuation Intangible Assets Valuation Sample Valuation Reports Financial Reporting Valuation Valuation Software Technology Valuation Real Estate Valuation etc.


2. Industry information

Industry overview Issues Trends & outlook Financial ratios and benchmarking Compensation and salary structure


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

Business valuation multiples (derived from company merger and acquisition transaction data)

Legal and tax resources Tax regulations Case laws


ANALYSIS AND ESTIMATE OF VALUE


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

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


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 .


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.


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)


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


REPORTING PROCESS


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 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

Limited Scope Valuations Formal Valuations Mergers and Acquisitions Comprehensive valuations


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 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 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.


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 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

Structuring the Sale-Structure to minimise tax liability

Structuring the company Sale of assets or sale of stock Reporting the sale


Valuation is an art, market driven, and subject to

negotiation


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

valuation of business

Economy & Finance