Corporate Valuations – Introduction Corporate Valuations:About Valuations:Introduction

Corporate Valuations - Introduction

Knowing what business is worth and what determines its value is prerequisite for intelligent decision making. Corporate valuations form the basis of corporate finance activity including M&A, fund raising, sale of businesses and also to meet regulatory and accounting requirements.

Many legislations in India have prescribed valuation methodologies to be applied in specific situations for a particular purpose but more recently, a few legislations have prescribed valuation as per internationally accepted valuation guidelines.

Though there are International valuation standards however not much guidance is available in India on the manner in which specific valuation methodologies are to be applied and different valuers take different assumptions leading to difference in value conclusion. In many cases the valuation also lacks uniformity and generally accepted global valuation practices. Thus, in the absence of standards of business valuation in India, the valuation is more of an art based on the professional experience and exposure of the valuer rather than science based on empirical studies and logics

Credible valuations are critical to the efficient working of the capital markets, businesses, government and all its stakeholders. With growing shareholder activism, importance of independent valuations is arising all over the world including India.

Role of a valuer is to consider the facts of each case, understand purpose of valuation and applicable regulatory norms for such transaction. Validation of the inherent assumptions of a business model is critical in any business valuation engagement. Limitations and Assumptions should be properly explained in the valuation report.

In our country, Valuation in itself is evolving. New concepts of “Registered Valuer” in Companies Act, 2013 and “Fair Value” in Ind-AS are setting the tone for Indian Valuation Standards. With the valuation process opening up in India and more debate happening on valuations, complex valuation methods are also getting recognition as valuation is emerging as a discipline in India.

In business valuation, variety of valuation methods typically categorized into three core Valuation approaches (Asset, Income and Market approaches) are considered and Premium & Discounts applied based on size and % of transaction under valuation to arrive at the Valuation for Shareholders.

Corporate Professionals Capital Pvt. Ltd. is a SEBI Registered (Cat-1) Merchant Banker and has a successful track record of providing a broad range of M&A, Transaction Advisory, Corporate Valuation Advisors, Corporate Valuation Consulting in India. Our Dedicated Team has more than 10 years of rich valuation experience. Our in-house research wing regularly identifies and prepares research articles on debated issues of business valuation, including how to apply the range of valuation techniques, including their appropriate application, advantages and disadvantages. We have created a niche in Valuation Services by executing more than 500 Corporate Valuations (uncoding tangibles & intangibles) of clients of International Repute across different Context, Industries and Boundaries and delivering well-reasoned and defensive Valuation Reports.

Key Facts of Business Valuation:

Interestingly Price is an outcome of a Transaction but Value need not require a Transaction Price is highly influenced by the prevailing market conditions but Value should not change materially unless fundamentals of the business change

Purpose of any valuation is very important. Like if the purpose is “Regulatory compliance / reporting” then the valuer has to strictly follow the prescribed valuation methodologies as the law of the land shall prevail

But if the purpose is “Business Valuation” then all valuation methodologies needs to be applied and value to be concluded based on facts of the case. Judgement and experience of Valuer would play a bigger role in this type of Valuation engagement.

Time is critical for any valuation engagement as Relative Valuation (by benchmarking of comparable peer companies or Transactions) is heavily dependent on the external market conditions of the Industry, economy etc. We have seen all start up valuations to be all euphoria driven

Person is relevant in Valuation as it can determine Minority or Controlling stake valuations and also impact Investment valuation by way of Synergy

To determine the Value of any business, the reasons for and circumstances surrounding the business valuation must be pre ascertained. These are formally known as the "Standard of Value" and "Premise of Value".

To be precise, the "Standard of Value" is the hypothetical conditions under which the business is valued and the "Premise of Value" relates to the assumptions upon which the valuation is based.

Standard of Value

The identification of the type of value being utilized in a specific engagement

Premise of Value

Talks about types of market conditions likely to be encountered.

Revenue Ruling 59-60 (Internal Revenue Service of USA)

Revenue Ruling (RR) 59-60 is one of the oldest guidance available on Valuation in the world but still most relevant for Tax Valuations specifically for valuing closely held common stock. It is the most widely referenced revenue ruling, also often referenced for Non Tax Valuations. While Valuing , it gives primary guidance on eight basic factors to consider-

  • • Nature the Business and the History of the Enterprise from its inception
  • • Economic outlook in general and outlook of the specific industry in particular
  • • Economic outlook in general and outlook of the specific industry in particular
  • • Book Value of the stock and the Financial condition of the business
  • • Earning Capacity of the company
  • • Dividend-Paying Capacity of the company.
  • • Goodwill or other Intangible value
  • • Sales of the stock and the Size of the block of stock to be valued
  • •Market prices of stock of corporations engaged in the same or a similar line of business

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