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BUSINESS VALUATION
STANDARDS IN
INDIA
Sanya Zaidi
Sana Khan
Saurav Raj Verma
Zubair Zargar
MBA-General (II Yr.
Section-C2011-2013
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Business Valuation Standard
The Business Valuation is a process to estimate
the economic worth of stakeholder's interest in a
business.
These are formally known as the"Standard of Value" and
"Premise of Value".
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Key Facts of Business Valuation:
Price is not the same as ValueThe Value of a business, by whatever business valuation
method it is obtained, is not the selling price of the business.
As Warren Buffett said, "Price is what you pay; Value is what
you get." They are not the same.
Value varies with Person, Purpose and Time
The Value is a subjective term and can have differentconnotations meaning different things to different people and
the result will not be the same, should the context or time
changes.
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Transaction concludes at Negotiated Prices
This value is still subjective, dependent on buyer and seller
expectations and subsequent negotiations and the Transaction
happens at negotiated price only.
Valuation is hybrid of Art & Science
Valuation is more of an art and not an exact science. The Art is
Professional Judgment and Science is Statistics. Mathematical
certainty is neither determined nor indeed is it possible as useof professional judgment is an essential component of
estimating value.
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Reasons for Business Valuation
For Merger and Acquisition
Dispute Resolution
Going Public
Voluntary Assessment
Succession Planning
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Accepted Methodologies of Valuation
Asset Approach
Income Approach
Market Approach
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Asset Approach (NAV)
Generally the Net Asset Value reflected in books do not usually include
intangible assets and are also impacted by accounting policies which
may be discretionary at times. NAV is not perceived as a true indicator
of the fair business value.
Book Value Method - It is based on the balance sheet review of assets
and liabilities
Replacement Cost Method - It is based on current set up cost of plantof a similar age, size and capacity
Liquidation Value Method - It is based on estimated realizable value of
various assets.
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d
Income ApproachThe Income based method of valuations are based on the premise that
the current value of any business is a function of the future value that an
investor can expect to receive from purchasing all or part of thebusiness.
Discounted Cash Flow Method (DCF)
In this method, the appraiser estimates the cash flows of any businessafter all operating expenses, taxes, and necessary investments in
working capital and capital expenditure is being met.
Capitalization of Earning Method
The idea is that the business value is defined by the business earnings
and the capitalization rate is used to relate the two.
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Market Based Approach
In this method, value is determined by comparing the subject, company
or assets with its peers or Transactions happening in the same industry
and preferably of the same size and region. This is also known as
Relative Valuation Method.
Comparable Companies Multiples Approach
Market Multiples of Comparable Listed Companies are computed andapplied to the Company being valued to arrive at a multiple based
valuation.
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Comparable Transaction Multiples Method
This technique is mostly used for valuing a company for M&A, thetransaction that have taken place in the Industry which are similar
to the transaction under consideration are taken into account.
Market Value Approach
The Market Value method is generally the most preferred method in
case of frequently traded Shares of Companies listed on StockExchanges having nationwide trading as it is perceived that the
market value takes into account the inherent potential of the
Company.
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Other Valuations Approaches
Contingent Claim Approach
Under this valuation approach, Option Pricing Model is applied to
estimate the Value. Generally ESOP Valuation for Accounting
purpose is done using the Black Scholes Method.
Price of Recent Investment Approach
Under this valuation approach, the recent investment in the business
by an Independent party may be taken as the base value for thecurrent appraisal, if no substantial changes have taken place since
the date of such last investment.
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Rule of Thumb Approach
Although technically not a valuation method, a rule of
thumb or benchmark indicator is used as a
reasonableness check against the values determined by
the use of other valuation approaches.
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Indian Perspective
For so long, Valuation has been debated in India as an
Art or Science and substantial part of the litigation in
Mergers & Acquisitions (M&A) takes place on the issue of
Valuation as it involves an element of subjectivity that often
gets challenged.
Institute of Chartered Accountants of India (ICAI) has
recently developed and recommendedBusiness Valuation
Practice Standards (BVPS) aiming to establish uniform
principles, practices and procedures for valuers performing
valuation services in India.
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The introduction of concept ofRegistered Valuer in the
Companies Bill, 2011 has also provided a framework toenable fair valuation in companies, thus standardizing the
use of valuation practices in India, leading to transparency
and better governance.
It has been observed that different regulators in India
(RBI, Income Tax, SEBI, etc) have prescribed different and
in some cases conflicting valuation methodologies creating
practical difficulties.
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Finally.
Valuation is more of an art and not an exact science, thoughthe value of a business can be objectively determined
employing valuation approaches.
This value is still subjective, dependent on buyer and seller
expectations and subsequent negotiations and use of
professional judgment is an essential component of
estimating value.
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THANK YOU!!!!