April 27, 2019

Methods of valuation of Companies


Valuation is an exercise or process to assess the worth of an enterprise or a property. Common valuation terms that relate to a company’s capital structure are equity value, enterprise value and invested capital value. Stated differently, enterprise value is equal to the company’s invested capital less its cash (i.e. Enterprise Value = Equity Value + Debt – Cash)

Methods of Valuation:

For Valuation of an enterprise or a property there are two types of Methods

  1. General Methods
  2. Methods which are prescribed under Law
  • 1- General Methods
  • Comparable Company Analysis (Public Company method):This method is generally applied for unlisted companies. This method estimates value by relating the same to underlying elements of similar companies for past years. For example- book value multiples (Valuation of Financial Institution or Banks).
  • Discounted Cash Flow Analysis (DCF):This method is based on that value of business is a direct function of its cash generating ability. This method tells that the value of an asset is the present value of expected future cash flows on that asset (including the present value of its terminal value).
  • SOTP Analysis: it is a range of values for a company’s equity by adding the values of its individual operating segments to arrive as the total firm value. It is generally used to relieve one or more business.
  • Ability to Pay Analysis (LBO):This method is used to compare the ability to pay of several potential acquirers and establish which can pay the highest price. In this method valuation is done by assuming the acquisition via a leveraged buyout, which use a borrowed fund to fund the purchase and assuming a required rate of return for the purchasing entity.
  • Precedent Transaction Analysis: This analysis include a control premium   paid by an acquirer to have control of the business and to complete M&A transactions it involves similar companies to get a range of valuation multiples.


  • 2- Methods which are prescribed under Law:
  • Pricing under IPO: It is used when company comes with IPO (Initial Public Offer). Company get list at this time.
  • Valuation under Preferential Allotment: This method is used to identify the value of Preferential Allotment when company issue preference shares.
  • Pricing of sweat equity shares under SEBI (Issue of sweat equity) regulations 2002: The value of sweat equity shares is determined as per the method prescribed under law at the time of issue sweat equity shares.
  • Valuation of stock option: The law prescribed the specific method to determine the value of stock option.
  • Determine the offer price under SEBI (Delisting of equity shares) Regulations 2009: At the time of delisting of equity shares, the value of offer price shall be determined as per the SEBI (delisting of equity shares) Regulations 2009 and as per method prescribed under other law.
  • Value of shares under the sweat equity unlisted companies (issue of shares) rules, 2003: Valuation of sweat equity shares is required When unlisted company issue sweat equity shares and is done as per sweat equity unlisted companies (issue of shares) rules, 2003.
  • Offer price under SEBI (SAST) Regulations regulation 8: Valuation of shares and company is required to determine at the time of Takeover and it is done as per regulation prescribed under SEBI SAST (Substantial Acquisition of Share and Takeover) Regulation 2011.  


Valuing a privately-held company is much more involved than just applying an estimated multiple to the company’s EBITDA (i.e. comes down to the application of asset, income and market-based valuation approaches).

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