May 13, 2019

Valuation of the Company for Acquisition

 

  • Introduction:

 

There are a number of situation in which a business or a share or any other property may be required to be valued, similarly while acquiring business it is important to do valuation. Valuation gives a theoretical value and it is essential to fix the value or consideration payable for an acquisition. It helps to conclude a transaction in a reasonable manner without any room for any doubt.

 

  • Valuation Standards & Principles:

The registered valuer shall, while conducting a valuation, comply with the following:

 

  • valuation Standards:

 

  1. internationally accepted valuation standards;
  2. valuation standards adopted by any registered valuers organisation

 

  • valuation Principles:
  1. Based on expectations
  2. Based on future cash flows
  3. Based on tangible capital assets

 

  • Factor should be consider while doing valuation:
  1. Purpose of valuation.
  2. Stock exchange prices of the shares of the two companies.
  3. The dividend paid on the shares.
  4. Relevant growth aspects.
  5. Value of the net asset.
  6. Quality and integrity of the management.
  7. Present and Prospective competition.
  8. Market sentiments.
  9. Future earning potential.
  10. Analysis of business history.
  11. Goodwill/Brand name in the market.
  12. Identifying economic factors directly effecting business.
  13. Study of exchange risk involved.
  14. Study of employee morale.
  15. Study of market capitalization aspects.
  16. Identification of hidden liabilities through analysis of material contracts.
  17. identity of the valuer and any other experts involved in the valuation;
  18. disclosure of valuer interest or conflict, if any;
  19. date of appointment, valuation date and date of report;
  20. Procedures adopted in carrying out the valuation and valuation standards followed.
  1. Methods & Techniques Of Valuation:

Valuation is done by an expert, who specialized in business valuations. There are many ways to value a business, depending on a company’s industry.The following are examples of business valuation:

  • Methods:

 

  1. Market value method: under this method average stock market value of the shares are considered.
  2. Price earning ratio method: The Price earning ration is to be calculated by dividing the current market price with earning per share.
  3. Asset value method: Net asset value is used by deducting from the total asset, all debts, and liabilities  shown in the latest financial statement.
  4. Discounted cash flow method: As per this method present value of the business is calculated with discounted factors for future cash flow.
  5. Earning based method: under this method it is assumed that the business will continue operating and valuation is made on earning based on rate of return on capital employed.

 

  • Techniques:
  • Capitalization of typical net earnings: A value can be attributed to future earnings resulting from the acquisition. To obtain the going concern value, a capitalization multiple is applied to these earnings and non-operating assets are added.
  • Capitalization of typical cash flows: The same as above with the exception that cash flows, rather than earnings, are capitalized.
  • Discounting of expected future cash flows: Consists of determining the most likely future cash flows and discounting them at the valuation date.
  • Determination of adjusted net assets: Liabilities are subtracted from the determined fair-market value of the assets. It is used for businesses, such as those in the real estate sector, whose value is asset-related rather than operations-related.
  • Other rules:

 

In some sectors of the service industry the value of a business is based on a multiple of revenues over a period determined by negotiation. In the final analysis, purchase conditions and the final price paid will be determined in your negotiations with the vendor.

  • Share: