Valuation of business

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  • Valuation of business

    1. 1. VALUATION OF BUSINESSRajkumar S. Adukia 093230 61049 / 093221 39642rajkumarfca@gmail.comhttp://www.carajkumarradukia.com
    2. 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. 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. 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. 5. Value to whom? DescendentsProspective Buyer PartnersEmployees Investors Sellers © Rajkumar Adukia 5
    6. 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. 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
    8. 8. VALUATION PROCESS © Rajkumar Adukia 8
    9. 9. Steps in Valuation process Engagement of expert Research and data gathering Analysis and estimate of value Reporting Process © Rajkumar Adukia 9
    10. 10. ENGAGEMENT OF EXPERT © Rajkumar Adukia 10
    11. 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. 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. 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. 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
    15. 15. RESEARCH AND DATA GATHERING © Rajkumar Adukia 15
    16. 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. 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 © Rajkumar Adukia 17
    18. 18. Resources required1. Business valuation publications2. Industry information3. Economic data4. Market transaction data5. Other resources © Rajkumar Adukia 18
    19. 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. 20. Business valuationpublications…  Mergers & Acquisitions Valuation  Intangible Assets Valuation  Sample Valuation Reports  Financial Reporting Valuation  Valuation Software Technology Valuation  Real Estate Valuation etc. © Rajkumar Adukia 20
    21. 21. 2. Industry information  Industry overview  Issues  Trends & outlook  Financial ratios and benchmarking  Compensation and salary structure © Rajkumar Adukia 21
    22. 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 © Rajkumar Adukia 22
    23. 23. 5. Other resources Business valuation multiples (derived from company merger and acquisition transaction data) Legal and tax resources  Tax regulations  Case laws © Rajkumar Adukia 23
    24. 24. ANALYSIS AND ESTIMATE OF VALUE © Rajkumar Adukia 24
    25. 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. 26. Business Valuation Methods1. Book value-based on books of accounts2. 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. 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. 28. Business Valuation Methods …5. Price Earning multiple: Price- earnings ratio (P/E) is the price of a companys share in the public market divided by its earnings per share. Multiply this by the net income to get a value for the business6. 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. 29. Business ValuationMethods …7. True value or market value: It is the amount that a buyer is finally willing to pay8. Dividend Capitalization: Determine dividend paying capacity of a business9. Sales Multiple Business Valuation: Widely used method. Annual sales multiplied by industry multiplier ( Obtain from financial publications or comparable business) © Rajkumar Adukia 29
    30. 30. Business Valuation Methods …10. Profit Multiple Business Valuation: Another widely used method. Pre tax profits multiplied by industry multiplier11. 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
    31. 31. REPORTING PROCESS © Rajkumar Adukia 31
    32. 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. 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. 34. Valuation Reports Limited Scope Valuations Formal Valuations Mergers and Acquisitions Comprehensive valuations © Rajkumar Adukia 34
    35. 35. Cost of ValuationThe 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. 36. Cost of Valuation… The availability, completeness and organization of the companys 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 © Rajkumar Adukia 36
    37. 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
    38. 38. SELLING A BUSINESS © Rajkumar Adukia 38
    39. 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 © Rajkumar Adukia 39
    40. 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. © Rajkumar Adukia 40
    41. 41. Tax concerns Structuring the Sale-Structure to minimise tax liability Structuring the company Sale of assets or sale of stock Reporting the sale © Rajkumar Adukia 41
    42. 42. Valuation is an art, market driven, and subject to negotiation © Rajkumar Adukia 42
    43. 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
    44. 44. © Rajkumar Adukia 44

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