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Knowing what business is worth and what determines its value is prerequisite for intelligent decision making. John Maynard Keynes said, "There is nothing so dangerous as the pursuit of a rational investment policy in an irrational world."

What is Valuation?
Valuation is the process of determining the “Economic Worth” of an Asset or Company under certain assumptions and limiting conditions and subject to the data available on the valuation date.
* Source -International Valuation Standard Council

Key Facts of Business Valuation:

  • Price is not the same as Value
  • Value varies with Person, Purpose and Time
  • Transaction Concludes At Negotiated Prices
  • 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 use of professional judgment is an essential component of estimating value.

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

  • Fair Market Value
  • Investment Value
  • Intrinsic Value
  • Fair Value

Premise of Value

Talks about types of market conditions likely to be encountered.

Two premises of Value

  • • Going Concern - Value as an ongoing operating business enterprise
  • • Liquidation Value when business is terminated

The art of valuation lies in identifying the key value drivers and the key risk areas after analyzing the following :

  • • Management & Promoter Group
  • • Future prospects and growth potential
  • • Competitive Environment
  • • Industry Peer Group
  • • Regulatory Environment
  • • Analysis of financial statements
  • • Variance analysis
  • • Minority discounts and control premium

Methodologies of valuation the Code-Methodologies of Valuation

Asset Based Method (NAV)

The asset based method views the business as a set of assets and liabilities that are used as building blocks to construct the picture of business value. Since every operating business has assets and liabilities, a natural way to address this question is to determine the value of these assets and liabilities. The difference is the business value. However, the Net Asset Value reflected in books do not usually include intangible assets and earning potential of  the business and are also impacted by accounting policies which may be discretionary at times. Thus, NAV is not perceived as a true indicator of the fair business value. However, it is used to evaluate the entry barrier that exists in a business and is considered viable for companies having reached the mature or declining growth cycle and also for property and investment companies having strong asset base.

Adjusted Net Asset method - For Calculating the Adjusted NAV, the valuer should factor in the contingent liability, Tax Shield on accumulated losses, impact of Auditor qualification and Due Diligence, money to be received from warrants, stock options and impact of corresponding shares.

Income Based Method

The 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 the business. It is generally used for valuing businesses that are expected to continue operating for the foreseeable future.

Market Based Method

In this method, value is determined by comparing the subject, company or assets with its peers in the same industry of the same size and region. Most Valuations in stock markets are market based. This is also known as Relative Valuation Method. This method is easiest to use when large number of assets comparable to the one being valued, assets are priced in the market, and there exist some common variable that can be used to standardize the price.

Other Methods


reasons to get valuation the Code-Reasons to Get Valuation the Code-Reasons to Get Valuation the Code-Reasons to Get Valuation the Code-Reasons to Get Valuation the Code-Reasons to Get Valuation the Code-Reasons to Get Valuation

Mergers and Acquisitions

Valuation is an important aspect in merger and acquisition. A valuation can not only assist business owners in determining the value of their business, it can also help them maximize value when considering a sale, merger, acquisition, joint venture or strategic partnership. While the value of a business estimated by a professional valuer may not perfectly match the price for which the business is sold, having a professional valuation lends validity to the selling company. When a business owner enters into negotiations with the other, a due diligence process begins that can be lengthy and exhausting. Without well-organized documentation of a company's historical financials and future prospects, a business owner may end up conceding more to the purchasing company than originally intended. The valuation process will also assist a company in organizing these materials.  read more...

Going Public

In general, when a new company goes for an Initial Public Offering (IPO) it is doing that in order to generate capital for growing its business. In such a circumstance, a question arises as to how to evaluate the fair value of such a stock. Valuing any company stock is a very subjective process. Each person will do it in a different way and will come up with different arguments specifically in case of IPO of new company as in such a case there is no past data to make an informed decision.   read more...

Succession Planning

Succession to Family Members

Succession to Employees

Succession to Outside Parties the Code-Reasons to Get Valuation

Dispute Resolution

Valuations are an increasingly important aspect of many commercial disputes. Before, deciding as to how to manage a dispute, it is necessary to determine the likelihood of a successful outcome and the potential stake involved.

Voluntary Assessment

At times the management of the company wants to know the true worth and fair value of the business for which they undertake the exercise of voluntary assessment for internal management purpose and future decision making.


Regulatory Mandate the Code-Reasons to Get Valuation


Valuers insight

Key Takeaways

  • Minimize bias in Valuation Process
  • Evaluate the stage of Business cycle
  • Do Sanity Check by different method
  • Justify business model and key assumptions
  • Substantiate data

Where things can go wrong

  • Excess, Cash and Non Operating assets
  • Transperency & Corporate Governance
  • Accounting Practices

    Terminal Value

    Cross Holdings
  • Legal environment and Tax Implication
  • Intangibles & IPR's
  • Subsequent Events
  • Off Balance sheet Items
  • Discounts & Premiums

Reconciliation and Value Conclusion

  1. Different methodology shows different range of values;
  2. Valuer shall consider relevance of each methodology depending upon the purpose and premise of each valuation;
  3. While Selecting the final value:
    1. Subjective Weighting
      In professional judgment the conclusion is based on experience and judgment given the quality of information and the approaches applied.
    2. Mathematical Weighting
      In mathematical weighting specific weights are assigned to each approach and weighted average calculated

    While concluding Value, all the methodologies must be considered and then weights applied as per the facts of the case. In other words, Value conclusion should be based on the Professional Judgement and Simple Average should best be avoided while concluding Value.

Valuation- The Law of Diminishing Returns the Code-Valuation- The Law of Deminishing Returns


Purchase Price Allocation


What is a Purchase Price Allocation?

  1. An acquiring entity must allocate the purchase price to the assets acquired and liabilities assumed based on estimated fair values at the date of acquisition;
  2. The excess of the cost of an acquired entity (including tangible and intangible assets) over the net of the amounts assigned to assets acquired and liabilities assumed is recorded as Goodwill; the Code-Valuation- Purchase Price Allocation

Why Purchase Price Allocation?

  1. Intangible assets recognized separately from goodwill must be valued and amortized for financial reporting purposes, if appropriate This may result in better Tax planning for undertaking the transactions of acquisition of assets and liabilities; Under Slump sale transaction, specifically the Intangible Assets can be separately accounted for by the Acquirer and Depreciation also claimed under the provisions of Indian Income Tax Law.

  2. IFRS 3: Business Combinations, requires the allocation of the purchase price in a purchase combination to be allocated between tangible and intangible assets based on fair value.

It may be noted that even under IFRS, there is no separate requirement of accounting separately for Intangibles. Thus the Valuation of Intangibles is needed specifically for PPA the Code-Valuation- Purchase Price Allocation

Business Valuation Standard

Business Valuation Standards are basically codes of practice that are used in business valuation. At present there is no prescribed standards for business valuation in India, in many cases the valuation lacks the uniformity and generally accepted global valuation practices. In the absence of standards of business valuation the valuation is more on an art based on the professional experience of the valuer rather than a science based on empirical studies and logics.

Internationally Business Valuations are governed by broadly these standards-

Valuation Standards of American Institute of CPAs (AICPA)
American Society of Appraisers (ASA)
Institute of Business Appraisers (IBA)
National Association of Certified Valuation Analysts (NACVA)
The Canadian Institute of Chartered Business Valuators (CICBV)
Revenue Ruling 1959-60 (USA)
ICAI Valuation Standard (Recommendatory)