An insight into business valuation
Standard and Premise of value?
Key facts of business valuation
- Price is not the same as value
- Value varies with person, purpose and time
- Transaction concludes at negotiated prices
- Valuation is hybrid of art & science
Some reasons to get business valuation
Generally acceptable methodologies of valuation
Asset approach (NAV)
- Book value method - It is based on the balance sheet review of assets and liabilities;
- Replacement cost method - It is based on current set up cost of plant of a similar age, size and capacity;
- Liquidation value method - It is based on estimated realizable value of various assets.
- Discounted Cash Flow Method (DCF) - DCF expresses the present value of the business as a function of its future cash earnings capacity. In this method, the appraiser estimates the cash flows of any business after all operating expenses, taxes, and necessary investments in working capital and capital expenditure is being met. Valuing equity using the free cash flow to stockholders requires estimating only free cash flow to equity holders, after debt holders have been paid off.
- Capitalization of earning method - The capitalization method basically divides the business expected earnings by the so-called capitalization rate. The idea is that the business value is defined by the business earnings and the capitalization rate is used to relate the two.
Market based approach
- Comparable companies multiples approach- Market multiples of comparable listed companies are computed and applied to the company being valued to arrive at a multiple based valuation.
- Comparable transaction multiples method - This technique is mostly used for valuing a company for M&A, the transaction that have taken place in the industry which are similar to the transaction under consideration are taken into account.
- Market value approach - The Market value method is generally the most preferred method in case of frequently traded Shares of companies listed on stock exchanges having nationwide trading as it is perceived that the market value takes into account the inherent potential of the company.
Other valuations approaches
- Contingent claim approach - Under this valuation approach, option pricing model is applied to estimate the Value. Generally ESOP valuation for accounting purpose is done using the black scholes method. Now even Patent Valuation is also done using black scholes method.
- Price of recent investment approach - Under this valuation approach, the recent investment in the business by an independent party may be taken as the base value for the current appraisal, if no substantial changes have taken place since the date of such last investment. Generally the last investment is seen over a period of last 1 year and suitable adjustments are made to arrive at current value.
- Rule of thumb approach - Although technically not a valuation method, a rule of thumb or benchmark indicator (like EV per room in hotel business) is used as a reasonableness check against the values determined by the use of other valuation approaches.
Valuation - Indian considerations
For any Professional Query, please contact: