An Enabling Platform for M&A, Investment Opportunities

and Business Partnerships in India

Business ValuationAlmost every business decision in one way or the other relies on valuation. When analyzing whether to invest in an asset, project or a business, the value of the asset or business is assessed and compared with the cost of acquiring it. Financing the investment also requires valuing debt or owner’s equity and deciding an appropriate mix of the two. 

Business Valuation Use

Business valuation has multiple uses. Some of the applications of valuation are - to render fairness opinion, to evaluate effectiveness of a business strategy, to communicate with analysts and shareholders, to buy and sell shares, and to compensate managers for their performance.

Business Valuation ChallengesValuing a publicly traded, stock exchange listed company is less of a challenge compared to valuing a start-up or/and a privately held company. The cash flow of a public company is well-known, established and predictable. Cash flow for a start-up is uncertain and unpredictable. Cash flow of a private company may be certain and predictable but unknown.

Business Valuation Usual Methods

The general approach to value a business is to compute the present value of its future cash flow. This cash flow could be in the form of dividend, free cash flow or residual income (the term popularized by Stern Stewart & Co is Economic Value Added), applying a discount rate that reflects the riskiness of the future cash flows.

Business Valuation Other Methods

Two other approaches of valuation are estimating the value of the subject company in comparison with the value of a similar company, and estimating the value that can be realized if the company is immediately liquidated.

What are the factors that determine value?

Some of the factors that determine the value of the business are Cash Flow, Customer diversification, Strong Key Management team, Company size, Industry outlook, Business Growth prospects, Competition

Does the valuation consider future prospect of my business?

It is important to consider future prospect of the business from both Sellers as well as Buyer’s perspective. Seller is interested to show the business potential in terms of growth prospects and as a result wants a higher business valuation. Whereas, the Buyer wants to evaluate the risks and opportunities going forward.

Does the valuation include intangible assets?

Intangible assets like goodwill, brand, trademarks and copyrights, intellectual property, royalty, software rights, etc. plays an important role in valuing a business. These are generally valued at acquisition costs.

Does the valuation reflect off-balance sheet liabilities?

If the business has significant amount of off-balance sheet liabilities, such as derivatives transactions, long-term lease agreements, the valuation should reflect these off-balance sheet liabilities.

Will the valuation consider the potential to expand capacity or similar business flexibilities?

Yes, the valuation shall consider the potential to expand capacity or any such business or operational flexibilities that is offered by a particular business.

How to value business goodwill or brand value?Valuing goodwill or a brand developed in-house (i.e. by incurring marketing expenditure, ensuring quality and meeting consumer expectations and perceptions) is always a challenge.

For the actual inclusion of brand-equity in value of a firm, the firm is valued using either the DCF or CCM (comparable company method) and some premium such as 15 - 20% is added to the value of the firm. 

The brand in order to have implications for valuation of a firm/business shall pass through two tests:(1) The brand must result into higher sales for the company compared to its competitors(2) Per unit price of the product that the company realises must be higher than similar products offered by competition.

How do you value a running business and how does it differ to a dormant business?

Running business shall be valued as a going concern. The valuation here shall be estimated based on its current cash flow, growth of cash flow, value of assets and liabilities and its capital investment. A dormant business on the other hand generally does not have cash flow or the cash flow does not originate from business operations, for example rent of property. In such cases the valuation of the firm shall be estimated considering market value of its fixed asset and adjusting that for any liability.

Have you got more questions, or would like to get a valuation quote for your running business in

India?

Drop an email at info@indiabizforsale.com

Click HERE

Call us on +91 8000 422 133

Vision

Build the largest technology enabled eco-system in India

for SMEs & Advisors for End to End Business Transactions