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VALUATION OF BUSINESS

Rajkumar S. Adukia 093230 61049 / 093221 39642 rajkumarfca@gmail.com http://www.carajkumarradukia.com

What is Business?
State of being busy, in the context of the individual as well as the community or society.  The social science of managing people to organize and maintain collective productivity toward accomplishing particular creative and productive goals, usually to generate profit.

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What is Valuation?
 

The act or process of assessing value or price of financial asset or liability; Valuation is done of assets-tangible as well as intangible and also for liabilities e.g. bonds issued Financial valuation may involve  Asset valuation  Business valuation
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What is Business Valuation ?


A business valuation determines the value of a business enterprise or ownership interest.  The methods depend upon purpose.  The theoretical valuation arrived at has to be perfected with market criteria, as the final purpose is usually to determine potential market prices


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Value to whom?

Descendents Prospective Buyer Partners Employees Investors Sellers

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Valuation time


Events that trigger the need for valuation  Disputing the conclusions of regulatory investigation  Planning for an initial public offering of company shares  Selling the company or hiving off a division  Conducting a major strategic-planning  Applying for loan  Seeking investors
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Valuation time
    

Creating a company stock-option plan. Breaking up a partnership Getting a divorce Liquidation /Filing for bankruptcy. Doing estate or gift planning that involves company stock

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VALUATION PROCESS

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Steps in Valuation process


Engagement of expert  Research and data gathering  Analysis and estimate of value  Reporting Process


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ENGAGEMENT OF EXPERT

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Skills required from expert


  

Understanding the concept and purpose of valuation Taxation aspects Accounting standards related to business combinations, intangible assets, employee options and financial instruments Understanding of performance measurement criteria for stock options
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Engagement of expert
   

Determine that the expert has the competence and experience . Consider and discuss whether there is any conflict of interest. Determine if the expert has sufficient resources to perform the work Consider scope of work to be performed and other issues, including the plan for payment of fees and expenses.
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Engagement of expert
 

 

Determine the standards to be used Determine the criteria that will be used to measure the experts/advisers work and document those criteria in an agreement Consider Form of report Draw up a confidentiality agreement

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Engagement of expert
 

Determine the legal interest to be valued & purpose of valuation Fees should be one of the considerations of selecting do not settle for lowest vendor or use competitive bidding.

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RESEARCH AND DATA GATHERING

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Issues to be considered
 Nature of business  History of Business  Economic outlook and the conditions of the specific industry  Financial condition and companys earning capacity  Dividend paying capacity and history  Market price of comparable publicly traded companies  Goodwill of the company  Dependency of companys value on current management
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Information to be provided
 Financial statements  Tax returns  Accounts receivable, accounts payable and inventory detail  Contracts/leases  Budgets/forecasts  Governance body minutes  Organization chart  Marketing material/price lists
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Resources required
1. 2. 3. 4. 5. Business valuation publications Industry information Economic data Market transaction data Other resources

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1. Business valuation publications


      General Business Valuation Transaction Data Industry-Specific Valuation Cost of Capital Professional Practice Valuation Partnership Valuation

 ESOP Valuation
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Business valuation publications


 Mergers & Acquisitions Valuation  Intangible Assets Valuation  Sample Valuation Reports  Financial Reporting Valuation  Valuation Software Technology Valuation  Real Estate Valuation etc.

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2. Industry information
     Industry overview Issues Trends & outlook Financial ratios and benchmarking Compensation and salary structure

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3. Economic data
 Bond yields and interest rates  Inflation and cost living data  Economic forecast resources.

4. Market transaction data


 cost of equity capital,  equity risk premiums
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5. Other resources
 Business valuation multiples (derived from company merger and acquisition transaction data)  Legal and tax resources  Tax regulations  Case laws

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ANALYSIS AND ESTIMATE OF VALUE

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Valuation process
 

Decide on business valuation method to be used Analyze the company information in conjunction with the industry and comparable company data.

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Business Valuation Methods


1. Book value-based on books of accounts 2. Income Capitalization Valuation Methoddetermine the capitalization rate (rate of return required to take on the risk of operating the business). Earnings are then divided by that capitalization rate

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Business Valuation Methods


3. Discounted Earnings- determines the value of a business based upon the present value of projected future earnings, discounted by the required rate of return (capitalization rate). 4. Discounted Cash Flow valuation- present value of liabilities is subtracted from the combined present value of cash flow and tangible assets, which determines the value .
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Business Valuation Methods


5. Price Earning multiple: Priceearnings ratio (P/E) is the price of a company's share in the public market divided by its earnings per share. Multiply this by the net income to get a value for the business 6. Replacement value : It uses the value of the replacement value of assets. Liabilities are deducted from the replacement value of the assets to determine the replacement value.
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Business Valuation Methods


7. True value or market value: It is the amount that a buyer is finally willing to pay 8. Dividend Capitalization: Determine dividend paying capacity of a business 9. Sales Multiple Business Valuation: Widely used method. Annual sales multiplied by industry multiplier ( Obtain from financial publications or comparable business)
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Business Valuation Methods


10. Profit Multiple Business Valuation: Another widely used method. Pre tax profits multiplied by industry multiplier 11. Liquidation Value: Liquidation value uses the value of the assets at liquidation. Liabilities are deducted from the liquidation value of the assets to determine the liquidation value of the business. Liquidation value can be used to determine the bare bottom benchmark value
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REPORTING PROCESS

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Contents of report
  

Description of engagement Description of business being valuedbackground Description of the information underlying the valuation  Budgets  Assumptions  Availability and quality of underlying data  Statement of responsibility for information received
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Contents of report


Description of procedures  Principle of valuation used  Valuation method used  Procedure for making projections  Significant assumptions Conclusion  Clear range of values and explanation

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Valuation Reports
   

Limited Scope Valuations Formal Valuations Mergers and Acquisitions Comprehensive valuations

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Cost of Valuation
The cost depends on :  Revenue of the business  The purpose of the valuation  Obtain a ballpark figure or price range  Asset allocation  Estate planning  Partnership  Litigation
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Cost of Valuation
 

The availability, completeness and organization of the company's financial records The type of details required in the report  Simple estimate of price range  Report with supporting documentation  Comparison with peer operations  Financial projections

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Fee structure


A deposit to review the project and list of fixed assets. After the review, the adviser will prepare an outline for business valuation and will prepare a quote for services . Disbursements and other miscellaneous charges are additional. These include expenses incurred during the project, for example, travelling, telephone and photocopy.
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SELLING A BUSINESS

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Before selling a business




Define priorities  Expectation from sale  Terms of payment  Expectation from buyer-continue with traditions etc. Timing of sale  When economy is strong  Industry performance is all time high Plan early  Make business attractive  Take time to find appropriate buyer
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Before selling a business




Renew all contracts and leases: Prospective buyers may not prefer a business if immediately on acquisition they have to renegotiate key contracts & leases. Take the help of experts: numerous regulations and tax matters to be considered .Also, owners are emotionally attached to do the valuation on their own.

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Tax concerns
   

Structuring the Sale-Structure to minimise tax liability Structuring the company Sale of assets or sale of stock Reporting the sale

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Valuation is an art, market driven, and subject to negotiation

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Remember!
Method of valuation selected depends on purpose of valuation  All valuation models have their limitations  Results will depend on quality of input data  All valuation models involve large number of assumptions


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