2. Valuation is not just figure but it
calibrates different knowledge
wisdom of art, science, social
economics, local laws regulation and
many human and potential hidden
dimensions.
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3. KEYTERMS IN VALUATION
Important terms used in valuation by various
stakeholders (persons, entities, government etc.)
who deals in incurring and/or acquiring “Cost” i.e..
incurred cost, decides and transact “Price” Base on
cardinal or perceive principle of “Valuation” as
opinion and/or judgment arrived in.
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4. DOMAIN OFVALUATION
• Business and Transaction Valuation for taxes and allied requirements
• Share, Goodwill, Patent, Trademark Valuation (Intangible Assets).
• Human Resource Valuation
• Fixed Assets Valuation Inventory Valuation ( Current Stocks)
• Merger , Acquisition, Reconstruction and Amalgamation.( Companies' Act 2013)
• The Assets Valuation shall cover Fair Valuation as per Ind As.
• Valuation under IBC Code 2016, ( For RDDBFCB Act and SARFESAI Act )for
resolution, liquidation, for Corporate Debtors (Bank/FIs/Companies/LLP,
• Individual, Partnership Firms with rules as frame there in from time to time.
• Enterprise Valuation, Fair Valuation and Liquidation Valuation.
• Assessment of Property Transition for Village Panchayat, Nagrapaliks, Municipal
corporation, State Revenue Taxes, Vehicles, Road-Toll Taxes and allied
requirements and allied., Registration and Court Fees and allied.
• Valuation under Direct Taxes: Capital Gain Tax, Transfer pricing provisions :
Comparable uncontrolled Price (CUP), Cost Plus Methods, Resale Price Method,
Profit Split Method, Transaction Net Margin Method & Indirect Taxation.
• Valuation Under Indirect Taxation: GST ACT Valuation with Rules frame there in.
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5. OTHER MATTERS TO BE
ATTAINED FOR
– Employee Stock Ownership Plan (ESOP).
– Solvency and Fairness Opinions
– Damage Assessment
– Dissenting Shareholder Actions
– Dispute resolution mechanism.
– For arriving for dissenting shareholders claims
– In Arbitration and out of Court Settlement
– Marital Dissolutions
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6. WHAT DRIVESVALUE?
Goods and services are assets when received & used
Control = ability to direct use of & obtain substantially remaining benefits
from asset & ability to prevent others from doing so
Benefits of an asset are potential cash flows (inflows or savings in
outflows) obtained directly or indirectly by using asset to–
* Produce goods or provide services
* Enhance the value of other assets
* Using the asset to settle liabilities or reduce expenses
* Selling or exchanging the asset
* Pledging the asset to secure a loan
* Holding the asset
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7. FAIR VALUE DEFINATION
THE PRICE THAT WOULD BE RECEIVED
TO SELL AN ASSET OR PAID TO
TRANSFER A LIABILITY IN AN ORDERLY
TRANSACTION BETWEEN MARKET
PARTICIPANTS (VALATOR/ APPRISER)
PERFORMS KEY ROLE TO ARRIVE FAIR
VALUATION.
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8. ENTERPRISE VALUE
• Enterprise value (EV), total enterprise value (TEV), or firm
value (FV) is an economic measure reflecting the market value
of a business. It is a sum of claims by all claimants: creditors
(secured and unsecured) and shareholders (preferred and
common).
.
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9. LIQUIDATION VALUE
Liquidation value is the likely price of an asset when it is
allowed insufficient time to sell on the open market, thereby
reducing its exposure to potential buyers. Liquidation value is
typically lower than fair market value.
Liquidation value may be either the result of a forced
liquidation or an orderly liquidation.
.
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10. WHYVALUATION IS DONE ?
Tax : (Direct, Indirect & State Taxes) For Estate/Gift, Buy/Sell
Agreements
Bankruptcy and Litigation
– Liquidation or Reorganization
– Patent Infringement
– Partner Disputes
– Economic Damages
Financial Reporting
– Purchase Price Allocation, Impairment Testing and Stock Options and
Grants, etc.
Strategic Planning/Transaction
– Value Enhancement
– Business Plan/Capital Raising
– Strategic Direction, Spin-Offs, Carve Outs, etc.
– Acquisitions, Due Diligence
.
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11. HOW BUSSINESS VALUATION IS
DONE (METHODS/APPROACH)
•NET ASSET BASED
METHOD/REPLACEMENT
COST MODEL
•MARKET APPROACH
•INCOME APPROACH 11/4
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12. Valuation Approaches
Overview of Valuation Approaches
Is the Business Enterprise a
viable, operating entity?
No
Yes
Liquidation Approach
• Asset-Based Methodology
• Income-Based Methodology
• Capitalized cash flow / earnings
• Capitalized EBIT / EBITDA
• Market comparables
• Other multiples based approaches
(Rules of Thumb)
Going Concern Approach
• Asset-Based Methodology
• Orderly vs. forced
13. NETASSET BASED METHOD
Net Assets/Book Value approach indicates the Value of the
Business by adjusting the assets and liabilities appearing in the
Balance Sheet of the Company which is being valued as the Value
Analysis date.
.
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15. LAND & BUILDING
•Under Ind. AS16, Assets classification
and Valuation measurement (Tangible
Assets ) shall Cover For Property Like
Real Estate Properties, Plant and
Machinery, Utilities, Furniture and
Fixtures, Vehicles etc and can be
Grouped based on entity specific
requirements.
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16. LAND
• Like Agriculture Land, Non Agriculture Land, Specific Intended Use
Land known as N.A. land Industrial, Residential, Commercial, Public
Utilities and services For Railways, Port, Civil Aviation, State
Transport & Bus Depots, Ware Houses for Water ways, Public
Road and like Garden Amusement, Archeological and related sites
etc.
• Land: From Ownership perspective of various entity i.e. owned
and/or lease (Short term or Long term) with riders with intended
uses, covenants etc.
• Based on above with Valuation of Intended purpose valuation are
required to be carried out for Various Stake holders and implication
to entities
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17. BUILDING
• Residential Buildings
• Industrial Buildings
• Commercial Buildings
• Hotel, Tourism, Leisure’s and amusement Parks
• Buildings related to Roads, Marine and Air Services infrastructure,
Logistic and Ware housing etc.
• Buildings for of Government, Local Bodies owned Like,
Metropolitan Cities, Municipal Corporations, Panchayat, Public
Services, Health like water, sanitation, waste deposal and
environment supporting systems.
• Other if any.
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18. PLANTAND MACHINERY
• Plant and Machinery related Production of Goods and Services to Specific
Industries: Engineering, Chemical & Process Plants, Marine Vessels, Air,
Vehicles, Power Sectors Like Hydro, Thermal, Nuclear, Equipments for
Agricultures, Deference Equipments Like Air, Marine and Army
Equipments on Land, Air, Water and distance war equipments like Missile
and Aero Space Engineering, Mining Mineral, Exploration, Dragging
equipments etc. Ware housing and Logistic Managements and allied.
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19. OTHER TANGIBLEASSETS
• Inventory
Inventory in terms of goods for sale, organizations manufactures , Service –
providers and and not-for - profit - also have inventories (fixtures, furniture,
supplies, etc.) that they do not intend to sell. Manufacturers', distributers and
wholesalers' inventory tends to cluster in warehouses . Retailer's inventory
may exist in a warehouse or in a Shops or store accessible to Customers
Inventories not intended for sale to customers or to clients may be held in
any premises an organization uses.
In manufacture, trade, warehousing and services are mainly classed as :
• Raw materials and components scheduled for use in making a product.
• Work in progress : WIP - materials and components that have begun their
transformation to finished goods.
• Finished goods : Goods ready for sale to customers.
• Goods for resale - returned goods that are salable.
• Stocks in transit.
• Consignment stocks
• Maintenance supply
In servicing of Products during Installation, commissioning trial run etc.
Inventory in Agriculture, Marine, Explorations, Minerals, Mines,
Construction, Farming, Animal Husbandry etc.
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20. VALUATION OFINTANGIBLEASSETS
• An intangible asset is a non-monetary asset that manifests itself by
its economic Properties. It does not have physical substance but
grants rights and economic benefits to its owner.
• An intangible asset is distinguishable from goodwill. Goodwill is any
future economic benefit arising from a business or a group of assets
which is not separable from the business or group of assets in its
entirety.
• Valuations of intangible assets are required for many different
purposes including acquisitions, mergers and sales of businesses or
parts of businesses, purchases and sales of intangible assets,
reporting to tax authorities, litigation and insolvency proceedings,
and financial reporting.
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22. VALUATION IN FINANCIAL STATEMENTS
• In many cases use of value in financial report is an alternative
option to historical cost, e.g.
• IndAS 2 – Inventories
• IndAS 16 – Property, plant and equipment
• IndAS 40 – Investment property
– although if cost adopted value must
be shown in notes to accounts
• IndAS 106 - Exploration for and Evaluation of Mineral Resources
First Time Adoption of IndAS (IndAS-101)
Fair Value Measurement (IndAS-113)
Financial Instruments (IndAS- 109)
Business Combinations (IndAS – 103)
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24. PRINCIPLE OF HABU AND LALU
HIGHEST AND BEST USE/USABLE(HABU)
Highest and best use is that use that would produce the
highest value for a property, regardless of its actual current
use.
LOWEST AND LEAST USE / USABLE (LALU)
Lowest and least use is that may use would produce the least
value for a property, regardless of its actual current
use.(Leftover land area after exploration of Minerals or/ and
polluted and unfriendly environmental asset/lands,
encroachment )
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25. Page
25
Valuation Approaches
Valuations – Asset Based Methodologies
• Asset based methodologies are most commonly used to value holding
companies, real estate and equipment
• Most common asset based techniques:
- Liquidation Value
• Consider using if business is not a going concern
• Orderly vs. Forced
• Tax considerations
- Adjusted Net Book Value
• Commonly used to value holding companies
• Tax considerations
- Replacement Cost
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Valuation Approaches
Valuations – Asset Based Methodologies Example
Book Value vs. Going Concern Value vs. Liquidation Value
Assets
Book Value
Going
Concern
Value
Liquidation
Value
Cash 1,000 1,000 1,000
Accounts Receivable 1,500 1,500 700
Inventory 800 800 600
Prepaids 200 200 -
Land 5,000 8,000 7,000
Equipment 2,500 2,500 1,000
11,000 14,000 10,300
Liabilities
Accounts Payable 1,000 1,000 1,000
Long term debt 2,500 2,800 2,500
3,500 3,800 3,500
Net Assets 7,500 10,200 6,800
Holdco. Co.
Balance Sheet
As at December 31, 2003
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27
Valuation Approaches
Income Based Methodologies – What are they and When are they
Appropriate?
• Underlying premise:
- Profitable company earns a reasonable rate of return on the invested
assets
- Value is calculated in relation to the cash flow or earnings available to the
stakeholders
- Value determined by converting anticipated future benefits to a present
single amount
• Separate consideration of excess or redundant assets that may be
extracted from operating business without impairing operations
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Valuation Approaches
Income Based Methodologies
• Some possible methodologies:
- Capitalized Earnings / Cash Flow
- Capitalized EBIT or EBITDA
- Discounted Cash Flow
- Other multiples – revenue, book value, etc.
• Appropriate multiples or rates of return developed through:
- Traditional financial market models
• Capital Asset Pricing Model, Weighted Average Cost of Capital, Build-Up Approach
- Public company comparables – trading and transactional information
- Analysis, experience and judgment
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32
Valuation Approaches
Income Based Methodologies – Earnings Based
• Earnings based methodologies are most commonly used to value operating
and going concern businesses
• Most common earnings based techniques:
- Capitalized Earnings or cash flow method
• Bases include EBITDA / EBIT / After tax earnings / Cash flow
• (Use multiple to convert constant stream of earnings or cash flow to a value
- Discounted Cash Flow (“DCF”)
• Present value forecast cash flows
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33
Valuation Approaches
Income Based Methodologies – Potential Normalization Adjustments
• Non-arm’s length transactions
• Discretionary compensation
• Earnings level – tax minimization incentive versus profit motive
• Unusual/non-recurring expenses
• Other non-business assets (redundancies)
• Existence of related companies / planning vehicles / services businesses
• Owner/Manager Remuneration
34. Earnings measure based on
accounting – Capitalisation
• Capitalisation rate expressed in percentage refers to
investment sum that an investor is willing to make to earn a
specified income
• The capitalization rate is another term for the rate of returns
expected on an investment in fields of commercial real estate;
this term is just a ratio of the rate of return to the actual
investment made on the commercial real estate project.
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35. Capitalisation rate
• Suppose an business gives a net operating income of Rs
10,00,000 is valued at Rs75,00,000
• we can calculate the capitalization rate of the building is:
• = 10,00,000/75,00,000 = 13.33%
• Thus, if the business is sold for 75 lakh, it can also be said that
the business was sold at a 13.33% capitalization rate.
or
Acquiring firm on an investment of 75 lakh can earn an income
of 13.33%
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36. Valuation Approaches
Income Based Methodologies – Factors Impacting Selection of Capitalization Rate.
• External Factors
- General economic conditions
- Opportunities and threats facing company
• Industry Factors
- Outlook
- Barriers to entry
• Internal Factors
- Strengths and weaknesses facing company
- Management
- Dependency on key customers or individuals
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37
Valuation Approaches
Earnings Multiple (P/E RATIO)
• Inverse of the Capitalization Rate
• Applied to earnings – either historical or future
• Cap Rate = Discount Rate – Growth Rate
• High risk = High return = Low multiple
• Selection of an appropriate earnings multiple requires professional
judgement
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38
Valuation Approaches
Determination of an Appropriate Multiple
• Build Up Method – small closely held companies
- Risk free rate + risk premium (subjective)
• Capital Asset Pricing Method (CAPM)
- Large businesses that are comparable to public companies
- Based on target company’s risk profile against an average public company
- Discount Rate = Rf + (Beta x Equity risk premium)
39. P/ E ratio
The price-to-earnings ratio is the ratio for valuing a company
that measures its current share price relative to its earnings per
share
The price-to-earnings ratio is also sometimes known as the price
multiple or the earnings multiple.
P/E ratios are used by investors and analysts to determine the
relative value of a company's shares.
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40. Page 40
Valuation Approaches
Income Based Methodologies – Example
EBITDA EBIT
Revenues 125,000 125,000
Expenses before interest and taxes & dep'n (30,000) (30,000)
Normalization adjustments:
One time professional fees (5,000) (5,000)
Market compensation adj. (10,000) (10,000)
Rent at market value adj. (10,000) (10,000)
EBITDA 70,000
Depreciation (20,000)
EBIT 50,000
EBITDA/EBIT multiple 6.0 8.5
Operating Enterprise Value 420,000 425,000
Less: Interest bearing debt (LT and ST) (100,000) (100,000)
Add: Redundant assets (eg, excess WC) 15,000 15,000
Fair Market Value Equity 335,000 340,000
43. MARKET APPROACH
Market multiple approach indicates the Value of the business by
comparing it to publicly traded companies and/or market transactions
in similar lines of business.
The approach based on the segment the business operates as per
universal factors affecting market conditions such as demand for
products, availabilities of inputs like Raw Materials, infrastructures,
price elasticity of demand, tax and duty regime, impact of business
cycles etc.
An analysis of these comparable companies then gives an opportunity to
access the Value of the Business under consideration.
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B.
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44. Page
44
Valuation Approaches
Valuations – Market Based Methodologies
• Market based methodologies are most commonly used to value operating
and going concern businesses
• Review multiples of comparable companies and transactions in the
marketplace
• Difficult to find an exact comparable company
• Application of public equity market multiples
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Valuation Approaches
Other Multiple Based Approaches – Rules of Thumb
Advantages:
- Simple to apply
- Relevant if widely publicized and used
Disadvantages:
- No empirical evidence that market actually follows
- How to apply (i.e. before debt?)
- Wide range of values
- Too general for specific company
- Sometimes not earnings based (i.e. multiple of sales)
Conclusion
- Used as a reasonability check most often
46. Market Transaction (M&A) Approach
–In the Guideline Merged and Acquired
Company Method, the value of the business
is indicated based on multiples paid for entire
companies or controlling interests.
–Public Market Transaction Approach
»Public Buyer or Seller Transactions
»Control Value
– Private Market Transaction Approach
»Private to Private Transactions
»Control Value
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47. INCOME APPROACH
xas per normal working cycle and its requirements. These cash
flows are then discounted at a cost of Capital that reflects the
risk of the business and capital structure.
–The various forms:
»Capitalization of Earnings/Cash Flow Analysis (Gordon
Growth Model)
» Discounted Cash Flow Analysis (DCF)
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48. Risk Factors
Fluctuation in sales/earnings
Degree of FL
Degree of OL
Nature of competition
Availability of Subsitute products
Level of Government regulations.
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