ARE YOU HEARING THE TERM ‘VALUATION’ QUITE OFTEN?

‘Startups’, ‘Funding’ ‘Company Valuation’ have become regular dining-table topics.

When deciding to invest in an IPO or anticipating a startup’s funding, everything seems to revolve around this concept of Valuation. But what exactly does this term mean? How is a business valued? Let’s understand!

WHAT IS COMPANY VALUATION/ BUSINESS VALUATION?

Business Valuation is calculating how much a company, a business or a potential business idea is worth at a specific time. It can be determined by either valuing its existing assets or by predicting its future earning potential.

Understanding the true value of a business is crucial for owners when negotiating terms for funding or selling the stake of the business or getting IPO listing and much more.

For investors and creditors, a thorough business valuation facilitates informed decision-making regarding their investments. Knowing the true value of a business allows them to assess risks and potential returns accurately.

HOW IS A BUSINESS VALUATION DONE?

In India and worldwide, the Valuation Techniques can be divided into three categories:

I. ASSET-BASED VALUATION:

It involves assessing a company’s net asset value (NAV) by determining the fair market value of its total assets minus liabilities. This approach is notably straightforward when compared to traditional methods such as income-based and market approaches.

There are three approaches to calculate the value of assets and liabilities under this method:

• Book Value Method: The assets and liabilities are valued at the carrying value or net asset value as recorded in the balance sheet.
• Replacement Cost Method: This approach determines the value of a company by assessing the cost of replacing its assets at their current market prices.
• Liquidation Value Method: The method calculates the valuation based on the realizable value of various assets at the time of liquidation.

1.  

Suitability of Asset-Based Approach

1. • Ideal for businesses with significant tangible assets, like real estate or equipment.

1. • It does not consider the future income potential of the business, making it least suitable for service-oriented or technology businesses. It is commonly used for banking, insurance business where price to book value multiple is often used.

II. INCOME-BASED VALUATION:

In this Valuation Technique, the business value is determined by calculating the present value of anticipated future cash flows the business is expected to generate. This method necessitates estimating future cash flows and determining an appropriate discount rate for these projections.

There are two approaches to Income Based Valuation:

1. • Discounted Cash Flow (DCF) Method: DCF calculates the present value of a business based on its future cash earnings capacity. It involves estimating the future cash flows & discounting them at an appropriate discount rate.

1. • Capitalization of Earnings Method: The valuation is determined by dividing a business’s expected earnings by the capitalization rate.

Suitability of Income-Based Valuation

Income-based valuation methods are effective for companies with stable and predictable cash flows and for startups at the ideation stage.

III. MARKET-BASED VALUATION:

The market-based approach to valuation determines the value of a company or assets by comparing them with peers or transactions within the same industry, preferably of similar size and region.

There are three approaches followed under Market Based Valuation:

1. • Comparable Companies Multiples Method: Market multiples of comparable listed companies are calculated and applied to the company being valued, resulting in a multiple-based valuation.

1. • Comparable Transaction Multiples Method: This method considers transactions similar to the one under consideration that have occurred in the recent times within the same industry.

1. • Market Value Method: The Market Value Method is a preferred choice, especially for frequently traded shares of companies listed on stock exchanges with nationwide trading. But as markets are irrational frequently, market price can deviate a lot upward or downward from the fair value. Hence it is said Price is what you pay, value is what you get.

Suitability of Market Based Valuation:

This Valuation Technique is relatively easy to perform and provides a quick estimate of a company’s price. However, challenges may arise in finding comparable transactions or companies , especially for businesses in niche industries.

7 UNCOMMON REASONS FOR GETTING BUSINESS VALUATION

While we are aware of the most common reasons why Business Valuation is done such as acquisitions or mergers, stake sale of a business, raising money from the public, or securing funding from investors/bankers.

There are some other uncommon reasons why Business Valuation is done such as:

1. Succession and Estate Planning

2. Divorce Settlement

3. Determining ESOPs

4. Exit Strategy Planning

5. Shareholder or Partnership Disputes

6. Litigation Support

7. Gift Tax Planning

HAVE YOU HEARD OF A CONCEPT CALLED – ‘Proactive Business Valuation’?

Business Valuation, often perceived as a necessity during specific events like mergers, acquisitions, or sale of a business, holds even more profound advantages when conducted regularly without a specific agenda.

Beyond the conventional motives, the ongoing assessment of a company’s value provides multifaceted benefits such as:

1.  Regular valuations pinpoint weaknesses and threats, allowing founders to address issues proactively.
2. Valuations provide accurate information to handle unexpected offers or events wisely and timely.
3. They play a crucial role in tax planning.
4. Regular valuations set clear values, reducing the likelihood of disputes by aligning expectations. 
5. Yearly valuations serve as benchmarks, offering insights into the business’s ongoing performance.
6. Knowing business strengths in advance aids negotiation for the best deal during a sale.
7. Understanding how the business’ performance is compared to competitors helps owners make informed decisions& strategies.
8. Owners can decide how to best use earnings—whether to reinvest, pay off debts, or distribute profits—based on
9. valuations, cost of capital and return on capital.

WHY CHOOSE MASTER BRAINS CONSULTING FOR YOUR VALUATION NEEDS?

Master Brains India offers comprehensive Business Valuation Services for all types of enterprises and industries. We are a team consisting of Valuation Experts and IBBI Registered Valuers, equipped with extensive experience and profound knowledge, committed to accurately assessing and unveiling the true worth of your business.

We advise & use Valuation methods that are the best fit for you and the industry in which you operate.

Whether you are considering mergers, acquisitions, IPO Listing, Funding, or seeking to enhance strategic planning, our Valuation Services offer a strategic advantage. Moreover, Regular Valuations with Master Brains Consulting can empower you with timely insights, enabling proactive decision-making that will contribute to long term success of your business.

GET YOUR BUSINESS VALUATION DONE TODAY WITH MASTER BRAINS.

DM us, call/WhatsApp us at +91-8595867402, or send your inquiries to www.masterbrains.co.in

As reviewed by: CA. Rochak Batta
[Registered Valuer (SFA), DISA, FAFD, Certified in Forex & Treasury Management]