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.
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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
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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
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5. Value to whom?
Descendents
Prospective Buyer
Partners
Employees
Investors
Sellers
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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
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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
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8. VALUATION PROCESS
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9. Steps in Valuation process
 Engagement of expert
 Research and data gathering
 Analysis and estimate of value
 Reporting Process
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10. ENGAGEMENT OF EXPERT
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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
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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.
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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
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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.
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15. RESEARCH AND DATA
GATHERING
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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
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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
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19. 1. Business valuation publications
 General Business Valuation
 Transaction Data
 Industry-Specific Valuation
 Cost of Capital
 Professional Practice Valuation
 Partnership Valuation
 ESOP Valuation
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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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24. ANALYSIS AND ESTIMATE OF
VALUE
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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.
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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
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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 .
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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
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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)
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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
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31. REPORTING PROCESS
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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
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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
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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
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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.
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38. SELLING A BUSINESS
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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
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