Valuing a business is a science as well as an art. Before starting the valuation exercise, the very first step is to look into the economy of the geography in which it is operating, then the Industry in which the company falls and then finally the company itself i.e. the top down approach.

The company is a constituent of an industry and then of the economy in which it falls as the valuation of the company vary from industry to industry and from geography to geography.

 Mr. Maneesh Srivastava
 Senior Manager
Two companies with the same top line and the same bottom line may get very different business valuation if there industry segment is different as the market multiple of the two company may vary significantly.

After understanding the economy and the industry the valuer needs to look into the standard of value and the premise of value.

The standard of value is of prime importance as it help to understand for what purpose we are valuing the business i.e. for regulatory purpose or for investment purpose or else and premise of value is used to understand whether we are valuing business on a going concern basis or on a liquidation basis.

There are three approaches to valuation- 

  • The Asset approach, 
  • The Income Approach and 
  • The Market Approach. 

Each approach has their own importance and it significance vary from Industry to Industry, like the Asset Approach is of prime importance when undertaking the valuation of Real estate companies which have land bank, while the Income approach is relevant when valuing a service company and market approach is prevalent when we need to understand the value of our company business on the basis the listed peer companies are getting value in the market.

The company which don’t have a strong balance sheet but have a very promising business plan and effective and experienced management team shall able to brag the higher value and here the most suitable valuation methodology shall be the discounted cash flow and forward year valuation multiple.

It being considered that the market is efficient and whatever price the stock are getting in the market as well whatever multiple the frequently traded stock are getting are true and valuation is justified on that basis. 

Whichever private equity deals are taking place in the market, is taking place on the basis of multiple like PE Multiple, Ebitda Multiple or else. Transaction multiple at such time is very important for any deal as the market plays a dominant role for deciding the value of the company.

The few factors needed to be taken care of while undertaking any valuation exercise are 

  • Promoter’s background, 
  • Succession planning of the company, 
  • Nature of business of the company, 
  • Economic outlook in general and outlook of the specific company in particular, 
  • Dividend paying capacity of the company, 
  • Past history and trend of business, 
  • Future potential of a business, 
  • Contingent liability or substantial legal issue, 
  • Concessional tax if any the company is enjoying, 
  • Corporate governance practices etc.