- 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:
- internationally accepted valuation standards;
- valuation standards adopted by any registered valuers organisation
- valuation Principles:
- Based on expectations
- Based on future cash flows
- Based on tangible capital assets
- Factor should be consider while doing valuation:
- Purpose of valuation.
- Stock exchange prices of the shares of the two companies.
- The dividend paid on the shares.
- Relevant growth aspects.
- Value of the net asset.
- Quality and integrity of the management.
- Present and Prospective competition.
- Market sentiments.
- Future earning potential.
- Analysis of business history.
- Goodwill/Brand name in the market.
- Identifying economic factors directly effecting business.
- Study of exchange risk involved.
- Study of employee morale.
- Study of market capitalization aspects.
- Identification of hidden liabilities through analysis of material contracts.
- identity of the valuer and any other experts involved in the valuation;
- disclosure of valuer interest or conflict, if any;
- date of appointment, valuation date and date of report;
- Procedures adopted in carrying out the valuation and valuation standards followed.
- 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:
- Market value method: under this method average stock market value of the shares are considered.
- Price earning ratio method: The Price earning ration is to be calculated by dividing the current market price with earning per share.
- Asset value method: Net asset value is used by deducting from the total asset, all debts, and liabilities shown in the latest financial statement.
- Discounted cash flow method: As per this method present value of the business is calculated with discounted factors for future cash flow.
- 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.
