A business valuation is the estimation of the value of a company's operation.
The process includes the evaluation of key performance ratios, risks and growth potentials.
It also includes an analysis of the company's financial statements, accounting records and other relevant information.
Business valuation relates to the original amount invested in a company and its present worth.
A valuation estimates the cash flow and profit that a company will generate in the future.
It also considers factors like the competitive environment, industry trends and economic conditions.
A valuation can help determine whether it’s a good time to buy or sell a business while providing you with information regarding its current value.
Many businesses opt to conduct their own internal valuations as well as external audits to improve their bottom line and increase returns on investment (ROI).
Conducting an internal appraisal/ Valuers and Appraisers in Lucknow
The first step towards conducting an internal appraisal is by creating an inventory list which includes all fixed assets such as machinery, office equipment, vehicles etc., intangible assets such as patents/copyrights/trademarks etc.,
inventory items including raw materials and finished goods etc., accounts receivable/payable amounts owed by/due from customers respectively along with any other accrued liabilities associated with your operation such as unpaid taxes due at different levels within government agencies like GSTN Aadhaar linkage issue etc.,
Prepaid expenses related expenses paid earlier but not used yet like advance rental payments made before moving into new premises were taken into account while calculating total Net Working Capital Value based on average cost principle method along with discount rate being applied.
What are needs of Valuation
valuation is the process of estimating a business's or similar entity's value. It is generally used in scenarios like these:
- Buying or selling of business
- Valuation for litigation, taxation etc.
- Merger and acquisition
- Asset divestiture
The value of the business is not only the sum of the assets it holds but also its goodwill value attached to by customers.
1. Buying or selling of business
If you are looking to purchase or sell a business, it is important to get an accurate value for your company.
The valuation process includes determining your assets' market value, considering their condition, age and location.
It also includes estimating the value of your goodwill. Goodwill is the additional value a buyer would pay beyond the book value/ liquidation amount to acquire another company's assets or shares.
The methods used for valuing businesses vary depending on whether they are publicly traded or privately held.
Public companies' stock price is usually used as one measure of fair market value; however, some private enterprises may not have any publicly traded stocks available for comparison purposes.
This could be due to them being newly established or having been recently privatized after running as state-owned enterprises since Independence from British Rule.
2. Valuation for litigation, taxation etc.
A valuation is an independent, objective opinion of the worth of a business.
Valuations are used to determine the value of a company for a variety of reasons, including:
- litigation and tax disputes
- estate planning and gift tax issues
- divorce settlements
- business succession planning and mergers & acquisition
3. Merger and acquisition
Merger and acquisition (M&A) is the process of buying and selling a company or business.
It can also mean combining two companies into one. This often involves purchasing outstanding shares in a company, which may be done in public or private transactions.
An M&A transaction can be initiated from within the target company, from outside by another firm or from investors who are interested in seeing their money grow further through such investments.
Mergers and acquisitions are important for new startups looking for capital to expand their businesses and established firms that want to enter new markets without having to build from scratch.
In these situations, an M&A deal might help reduce costs associated with starting up an entirely new venture while still giving your business access to customers that were previously unattainable due to geographic limitations or other reasons like differing regulatory frameworks between regions/countries where both parties operate at the present time."
4. Asset divestiture
Asset divestiture is a term used to describe the process of selling off a company's assets to different buyers.
This can be done for various reasons, such as raising funds or eliminating competition.
It's usually done by selling off the company's assets to different buyers so they're not all owned by one company at once.
The value of the business is not only the sum of the assets it holds but also the goodwill value attached to the business by its customers
The value of the business is not only the sum of the assets it holds but also the goodwill value attached to the business by its customers.
Goodwill value, or brand value, is intangible and not easily quantifiable. It can, however, be estimated by considering factors like:
- The reputation and public image of a company or product
- The extent to which a company's brand has been established in its market and beyond
- The longevity of a company's success in retaining customers
- A potential buyer's belief that they will continue to benefit from using or purchasing your business' products or services
Regulatory Body and Law Applicable for Valuation in India/ Approved valuer
The following are the regulatory bodies governing valuations in India:
- Securities and Exchange Board of India (SEBI): SEBI is a statutory body set up under the Securities and Exchange Board of India Act, 1992, which regulates all aspects of securities, including stock exchanges, investment banking institutions, mutual funds etc. The business is evaluated by various companies that SEBI has licensed to provide this service.
- The Companies Act, 2013: The Companies Act 2013 governs all aspects related to the formation of new companies or companies that wish to restructure their existing businesses so as to get more value out of them through innovative ways like mergers & acquisitions etc.; These regulations also cover valuation during financial restructuring such as amalgamation/demerger/restructuring schemes involving voluntary liquidation under Section 10(3) or forced liquidation under Section 438A(1)(b) or winding up proceedings against insolvent companies where valuation has been ordered under Section 436A(d).
- Listing Agreement: It contains provisions relating to valuations in cases where shares are listed on a stock exchange such as BSE Limited (Bombay Stock Exchange), NSE Limited (National Stock Exchange), MCX-SX Limited (Multi Commodity Exchange - South East Asia).
- Listing Regulations: These regulations lay down guidelines for conducting fair and transparent valuations across various segments such as real estate developers; infrastructure projects; retail chains; IT firms etc.
Types of Valuation Approaches
There are several different types of valuation approaches. Each approach has its own strengths and weaknesses. These approaches include:
- Market-based approach – This method uses independent market data to estimate fair market value for a company. For example, if the average price per share for publicly traded shares of similar companies is $10 and your business has 200,000 shares outstanding, then your company's market capitalization would be $2 million ($10 x 200k).
- Income-based approach – This method values the business based on its future income potential or cash flow potential. For example, suppose you have been profitable over the past five years with revenue growth averaging 10% a year, and you expect this trend to continue for at least another three years (even though there may be some ups and downs). In that case, your business could likely sell for approximately 2 times annual revenues plus any excess cash in excess of 5% of assets on hand—or maybe even more if you were able to show strong management skills in addition to these financials.
- Asset-based approach – This method values businesses based upon their tangible assets, such as equipment or intellectual property rights, such as patents/trademarks/copyrights; however, this type of valuation is not very common since large portions of most businesses' assets cannot easily be liquidated (e.g., goodwill).
Procedure for Valuation
The valuation process is very detailed and time-consuming. The first step in the process involves:
- Identifying the business, its legal status, ownership structure and financial performance.
- Preparing a business plan and financial projections based on assumptions that you believe are reasonable in the context of your industry or market to estimate future cash flows from operations. These assumptions include things like sales growth rates, profit margins etc.
Especia is a leading valuation firm in India. The company offers its clients a wide range of valuation services, including business valuations, real estate valuations and intangible asset valuations.
Especia has a team of highly qualified and certified professionals who are experts in their respective fields.
We are committed to providing accurate and timely customer appraisals at competitive rates.
In conclusion, many factors contribute towards the valuation of a given business.
It is dependent on assets and the goodwill value attached by its customers.
It is important to understand each of these factors before deciding to value your business for various purposes like buy out, merger or acquisition, etc.