Jalna CA Study Circle Meeting held on 3rd Jan

1Presented By

CA Swatantra Singh, B.Com , FCA, MBA Email ID: singh.swatantra@gmail.com New Delhi , 9811322785, www.caindelhiindia.com, www.carajput.com

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VALUATION OF BUSINESS23What 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.

34What 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 issuedFinancial valuation may involveAsset valuationBusiness valuation

45What 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

5jbbmju6SellersProspective BuyerInvestorsDescendents

PartnersEmployees Value to whom?67Valuation time Events that trigger the need for valuationDisputing the conclusions of regulatory investigation Planning for an initial public offering of company sharesSelling the company or hiving off a divisionConducting a major strategic-planningApplying for loan Seeking investors

78Valuation timeCreating 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

89VALUATION PROCESS

910Steps in Valuation processEngagement of expertResearch and data gathering Analysis and estimate of value Reporting Process

1011ENGAGEMENT OF EXPERT

12Skills required from expertUnderstanding the concept and purpose of valuationTaxation aspectsAccounting standards related to business combinations, intangible assets, employee options and financial instrumentsUnderstanding of performance measurement criteria for stock options1213Engagement of expertDetermine 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 workConsider scope of work to be performed and other issues, including the plan for payment of fees and expenses.1314Engagement of expertDetermine the standards to be usedDetermine the criteria that will be used to measure the experts/advisers work and document those criteria in an agreementConsider Form of report Draw up a confidentiality agreement 1415Engagement of expertDetermine the legal interest to be valued & purpose of valuationFees should be one of the considerations of selecting do not settle for lowest vendor or use competitive bidding. 1516RESEARCH AND DATA GATHERING

1617Issues to be consideredNature of business History of BusinessEconomic outlook and the conditions of the specific industry Financial condition and companys earning capacityDividend paying capacity and history Market price of comparable publicly traded companies Goodwill of the companyDependency of companys value on current management

1718Information to be providedFinancial statements Tax returns Accounts receivable, accounts payable and inventory detail Contracts/leases Budgets/forecasts Governance body minutes Organization chart Marketing material/price lists

1819Resources requiredBusiness valuation publicationsIndustry informationEconomic dataMarket transaction dataOther resources19201. Business valuation publicationsGeneral Business ValuationTransaction DataIndustry-Specific ValuationCost of CapitalProfessional Practice ValuationPartnership ValuationESOP Valuation 2021Business valuation publicationsMergers & Acquisitions Valuation Intangible Assets ValuationSample Valuation ReportsFinancial Reporting ValuationValuation Software Technology ValuationReal Estate Valuation etc.

222. Industry information

Industry overviewIssuesTrends & outlookFinancial ratios and benchmarkingCompensation and salary structure

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23 3. Economic data

Bond yields and interest ratesInflation and cost living dataEconomic forecast resources.

4. Market transaction datacost of equity capital, equity risk premiums

245. Other resources Business valuation multiples (derived from company merger and acquisition transaction data)Legal and tax resourcesTax regulationsCase laws2425ANALYSIS AND ESTIMATE OF VALUE

2526Valuation processDecide on business valuation method to be usedAnalyze the company information in conjunction with the industry and comparable company data. 2627Business Valuation MethodsBook value-based on books of accounts Income Capitalization Valuation Method-determine the capitalization rate (rate of return required to take on the risk of operating the business). Earnings are then divided by that capitalization rate

2728Business Valuation MethodsDiscounted 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). 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 .

29Business Valuation Methods Price Earning multiple: Price-earnings 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 businessReplacement 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.

2930Business Valuation Methods True value or market value: It is the amount that a buyer is finally willing to payDividend Capitalization: Determine dividend paying capacity of a businessSales Multiple Business Valuation: Widely used method. Annual sales multiplied by industry multiplier ( Obtain from financial publications or comparable business)

3031Business Valuation Methods Profit Multiple Business Valuation: Another widely used method. Pre tax profits multiplied by industry multiplier 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

3132REPORTING PROCESS

3233Contents of reportDescription of engagementDescription of business being valued-backgroundDescription of the information underlying the valuationBudgetsAssumptionsAvailability and quality of underlying data Statement of responsibility for information received

3334Contents of reportDescription of proceduresPrinciple of valuation usedValuation method used Procedure for making projectionsSignificant assumptions ConclusionClear range of values and explanation

3435Valuation ReportsLimited Scope ValuationsFormal ValuationsMergers and AcquisitionsComprehensive valuations

3536Cost of ValuationThe cost depends on :Revenue of the businessThe purpose of the valuation Obtain a ballpark figure or price range Asset allocationEstate planning PartnershipLitigation

3637Cost of ValuationThe availability, completeness and organization of the company's financial recordsThe type of details required in the report Simple estimate of price range Report with supporting documentationComparison with peer operationsFinancial projections

3738Fee structureA 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. 3839

SELLING A BUSINESS

3940Before selling a businessDefine prioritiesExpectation from saleTerms of payment Expectation from buyer-continue with traditions etc.Timing of saleWhen economy is strongIndustry performance is all time highPlan early Make business attractiveTake time to find appropriate buyer

4041Before selling a businessRenew 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.

4142Tax concernsStructuring the Sale-Structure to minimise tax liabilityStructuring the companySale of assets or sale of stockReporting the sale

4243Valuation is an art, market driven, and subject to negotiation

4344Remember!Method of valuation selected depends on purpose of valuationAll valuation models have their limitationsResults will depend on quality of input dataAll valuation models involve large number of assumptions

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Presented By

CA Swatantra Singh, B.Com , FCA, MBA Email ID: singh.swatantra@gmail.com New Delhi , 9811322785, www.caindelhiindia.com, www.carajput.com

End of Presentation.Thank you

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