What's Your Business Worth ?

Ever Wondered what’s your Business Worth ? Our Valuation Team has prepared a crisp Video on “How to Value a Company” for its broad understanding. Do let us know your feedback.

“Knowing what business is worth and what determines its value is prerequisite for intelligent decision making”. Corporate valuations form the basis of corporate finance activity including M&A, fund raising, Sale of businesses, Succession planning and also to meet regulatory and accounting requirements. The rapid globalization of the world economy has created both opportunities and challenges for organizations leading to uncertainty blowing across global markets and raising the importance of independent valuations all over the world. Justifying the value of businesses has grown more complex and challenging as its been accepted that valuation of closely held / infrequently traded listed shares is not an exact science and depends upon a number of factors like purpose, minority/ controlling interest, stage, financials, industry, management and promoters strengths etc.

Corporate Professionals Capital Pvt. Ltd. is a SEBI Registered (Cat-1) Merchant Banker and has a successful track record of providing a broad range of M&A and Transaction Advisory Services. Our Dedicated Team has more than 10 years of rich valuation experience. Our in-house research wing regularly identifies and prepares research articles on debated issues of business valuation, including how to apply the range of valuation techniques, including their appropriate application, advantages and disadvantages. We have created a niche in Valuation Services by executing more than 500 Corporate Valuations (uncoding tangibles & intangibles) across 15 Industries for clients of International Repute and delivering well-reasoned and defensive Valuation Reports.

We value businesses (both Indian and Global) and attribute value to Equity Shareholders, Compulsory Convertible Instruments (CCPS/CCD’s) and Debt/Optionally Convertible Instruments. We also help businesses in allocating acquisition value into different set of Assets including Intangibles.

Call our Valuation Team at + 91 7210114523; email at info@corporatevaluations.in or visit our dedicated Valuation portal at www.corporatevaluations.in

Brand Valuations

"If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trademarks, and I would fare better than you."— John Stuart, Chairman of Quaker

Brand has come a long way from the time when it was first thought that the brand was just another word for Logo. It is widely appreciated that brand is one of the most valuable assets an organisation owns. This is because of the economic impact that brands have. Brand influence the choices of customers, employees, investors and government authorities. A study concluded that on average brands account for more than one-third of shareholder value. The study reveals that brands create significant value either as consumer or corporate brands or as a combination of both.

Mr. Maneesh Srivastava
Sr. Manager
+919871026040
maneesh@indiacp.com

NEED OF BRAND VALUATION

A brand can be valued anytime and for many reasons, that includes- Brandstrategy, Financial Reporting, Mergers and acquisitions, value reporting, licensing, legal transaction, accounting, strategic planning, management information, taxation planning and compliance, liquidation.

Several studies have tried to estimate the contribution that brands make to shareholder value on an average brands account for more than one-third of shareholder value. The study reveals that brands create significant value either as consumer or corporate brands or as a combination of both.

Below is the whole article which you can read or download:

SUM OF THE PARTS (SoTP) VALUATION

“Company A is doing Sugar Business with Value of Say Rs 100 and company B is doing Cement Business with Value of say again Rs. 100 then what should be the value of company C doing both the above business by itself, On unitary basis it should be Rs 200."

In terms of Schedule 1 of the Notification, an Indian company may issue equity shares/compulsorily convertible preference shares and compulsorily convertible debentures (equity instruments) to a person resident outside India under the FDI policy, subject to inter alia, compliance with the pricing guidelines. The price/ conversion formula of convertible capital instruments is also require to be determined upfront at the time of issue of the instruments.

Value of C company = Value of A company + Value of B company

ENTERPRISE VALUE : THE MARKET VALUE OF THE WHOLE BUSINESS?

Enterprise value (EV) is an economic measure which reflects the market value of a whole business. It is a sum of claims of all the security-holders: debt holders, preferred shareholders, minority shareholders, common equity holders, and others. Enterprise value is one of the fundamental metrics used in business valuation, financial modelling, accounting, portfolio analysis, etc.

EV= Market value of Equity + Market value of Debt + Minority Interest at Market Value + Preferred Equity at Market Value – Cash & Cash Equivalent + Market Value of Non Operating Assets

RELATIVE VALUATION

Relative Valuation uses the valuation ratios of Comparable of publicly traded companies and applies that ratio to the company being valued subject to necessary adjustments. The valuation ratio typically expresses the valuation as a function of a measure of financial performance or Book Value Multiples (e.g. Revenue, EBITDA, EBIT, Earnings per Share or Book Value).

"A key benefit of Relative Valuation analysis is that the methodology is based on the current market stock price. The current stock price is generally viewed as one of the best valuation metrics because markets are considered somewhat efficient. But applying multiples is not a straight forward technique and many considerations have to be kept in mind when valuing a company. Sanity check is advised by using other valuation methods as well."

VALUATION IN INFORMATION TECHNOLOGY (IT) SECTOR COMPANIES

It is believed in the market that “Technology has the shelf life of a banana.” If that happens then what factors drives the value of Information Technology based companies whose survival is totally dependent on that. The answer of this question is not so easy as it appears to be, As whatever the size of organizations, large or small, face the same dilemma: Scare resources, choosing and deploying the right resources at right time & at right place to maximize the organization performance.

"It has been observed that the Valuation trend in the high growth segment of IT industry (E-Commerce & Social Networking) is on an upswing and though there exist limited public listed companies in this segment, majorly all trade at very high valuation multiples with corresponding high volatility owing to their sensitive business models, prone to competition with new technology and recent developments. Where would their Valuations be stabilized would be decided in times to come."

REGISTERED VALUER UNDER COMPANIES ACT 2013

The Companies Act, 2013 has introduced the concept of ‘Registered Valuer’ to cover valuation in respect of any property, stock, shares, debentures, securities, goodwill or any other assets of the company including its net worth and liabilities.The Draft Rules provide that a Register of Valuers shall be maintained by the Central Government in which there shall be registered the names, address and other details of the persons registered as valuers.The eligibility criteria to be registered as a valuer have been provided in the Draft Rules. Though business valuations are required in varied situations such as court approved M&A, fresh issue of shares, transfer of shares etc., the concept of valuation as a code is new to India.The Companies Act, 1956,despite using the term ‘valuation’ in some sections,does not specify the basis on which such valuations shall be done or who will do them.

Sharing here a detailed article on Register Valuer under Companies Act 2013 which is published on Slideshare to be read or downloaded...

MODIFICATION OF PRICING GUIDELINES FOR FDI INSTRUMENTS WITH OPTIONALITY/ BUYBACK CLAUSE

As a relief, the recent RBI notification has allowed the optionality clauses in equity shares under FDI. However, it has also prescribed that exit value will be determined at the time of exercise of the buyback option so that the investor exits without any assured IRR (confirming with the basic principle that Equity Investor cannot be not guaranteed any assured exit price at the time of making such investment).

In this context, RBI has validated a new mechanism for valuation (capping exit from unlisted companies based on ROE and listed companies based on their prevailing market price) for cases where such shares were issued with optionality clause (under Buyback arrangement).

However, specifically for exit of compulsory convertible instruments, RBI has allowed use of any internationally accepted pricing methodology duly certified by a Chartered Accountant or a SEBI registered Merchant Banker which provides more flexibility and discretion to the foreign investors (compared to sole method of DCF prescribed till now). 

Download RBI Circular Here

To know how we can assist you with our FDI Valuation Services, please contact:

Mr. Chander Sawhney
Vice President

Corporate Professionals

+911140622252, +919810557353,
Email:- chander@indiacp.com

Mr. Pankaj Singla
Sr. Associate

Corporate Professionals

+9111406222293, +919971508320,
 Email:- pankaj@indiacp.com

MANTRA FOR PITCHING YOUR BUSINESS

If you have started a business and have travelled the road from the idea or the conception point to the stage of actually delivering the product or service to the customer, then it is right time to become cautious. While taking any step forward a lot of options start taking place. Somebody might feel interested to pay you cheap money to buy your company, somebody wants to acquire stake in your business at a bottom level valuation, and somebody might copy your idea and start making big. The simple mantra is “If you have an apple, don’t sell it like banana”.

 Mr. Maneesh Srivastava
 Senior Manager
 +91-9871026040
 maneesh@indiacp.com

There are so many ideas but very few able to take shape and reach scalability. The passion is one factor which drives the business, but there are some useful tips for the entrepreneur who has entered the virgin land and want to make big.

HOW TO VALUE A BUSINESS?

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
 +91-9871026040
 maneesh@indiacp.com

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. 

PATENT VALUATION- THE VALUE DRIVER OF BUSINESS

A patent is a set of exclusive rights granted to an inventor or their assignee for a limited period of time, in exchange for the public disclosure of the invention. An invention is a solution to a specific technological problem which helps in inventing something new or which helps in increasing the efficiency of a process.

In the current context, the intangible plays a significant part in creating value preposition of the company. The business value covers both the tangible and intangibles. Valuation of intangibles becomes relevant when there is a need to do purchase price allocation i.e. when you want to allocate the excess of the consideration paid for acquiring the asset over and above the tangible assets.

Historically the excess consideration paid over and above the tangible assets is adjusted as goodwill, however if we can identify the tangible assets of business then allocation of value can be made to it and post this balance left is considered as goodwill.

In the books of account the intangible finds a place if it is acquired from outside, however if it is self generated then its impact is not considered in the books of account.

Valuation of patent

Traditionally, there are three approaches to valuation

·         Cost Approach
·         Market Approach
·         Income approach

Ideally, all three approaches need to be looked at while deciding the value of patent. However, we give preference to income approach for valuing unique, income generating properties such as patents.

A cost approach is seldom useful for patents, and market approach may not be relevant because patent are unique by definition and comparable patents may be difficult to identify.

The most prominent approach to patent valuation is income approach which considers method like royalty based or profit contribution method which can factor in the cash flow stream generated by patent.

Check-list of documents needed to be taken care while assigning value to patent are -

Ø  Check whether the patent is in force or not and patent maintenance fee is paid or not if not patent is worthless.
Ø  Description of any litigation, past or present.
Ø  Copies of any contract, licensing agreement or offer to license pertaining to patent.
Ø  Available economic data on the industry in which invention is used.
Ø  Useful life of patent.
Ø  Inquire about patent validated.
Ø  Details of any prior royalties paid for patent.
Ø  Identify the next best alternative technology.
Ø  The projected cash flow from patent.

This article has been written by :-

Mr. Maneesh Srivastava
Sr. Manager

Corporate Professionals

+9111406222255, +919871026040,
Email:- maneesh@indiacp.com

ADJUSTED NET ASSET METHOD OF VALUATION

Continuation of previous post- METHODOLOGIES OF VALUATION : ASSET BASED METHOD

For Calculating the Adjusted NAV, the valuer should factor in the contingent liability, Tax Shield on accumulated losses, impact of Auditor qualification and Due Diligence, money to be received from warrants, stock options and impact of corresponding shares.

Book Value Method

This form of valuation is based on the books of a business, where owners' equity i.e. total assets minus total liabilities are used to set a price. There are a couple of problems with this simplified method. First, unless you audit the business' books, you cannot be certain that the numbers presented are correct. Secondly, the value of some assets, such as buildings, equipment and furniture/fixtures, may be overstated in the books, and may not reflect the maintenance and/or replacement costs for older assets. As a result, most business valuation experts prefer to use an adjusted book value.

METHODOLOGIES OF VALUATION : ASSET BASED METHOD (NAV)

The asset based method views the business as a set of assets and liabilities that are used as building blocks to construct the picture of business value. Since every operating business has assets and liabilities, a natural way to address this question is to determine the value of these assets and liabilities. The difference is the business value.

However, the Net Asset Value reflected in books do not usually include intangible assets and earning potential of the business and are also impacted by accounting policies which may be discretionary at times.

BUSINESS VALUATION

Valuation is more on an art based on the professional experience of the valuer rather than a science based on empirical studies and logics. Though internationally business valuations are governed by broadly various standards like: Valuation Standards of American Institute of CPAs (AICPA), American Society of Appraisers (ASA), Institute of Business Appraisers (IBA), National Association of Certified Valuation Analysts (NACVA), The Canadian Institute of Chartered Business Valuators (CICBV), Revenue Ruling 59- 60 (USA), ICAI Valuation Standard (recommendatory) however keeping in view the growing relevance and importance of valuation in business and investment decisions as well as in regulatory compliance processes the development of practice of valuation as a discipline and profession in the present context has become a necessity because of imperatives of financial markets, emerging global economy, and changing framework of accounting and financial reporting.