In general, business valuation includes processes to determine the economic value of a business or a company unit. The process is typically used to determine fair value of a business for various reasons: taxation, sales value, to initiate partner ownership, or may even be needed for divorce proceedings. Entrepreneurs require business valuation services to obtain an estimate of the value of the business.
Valuation practitioners can perform valuation of business for: tangible assets, intangible assets, business interests, stock and other securities, private debt instruments, etc. These services are crucial for businesses to go ahead with mergers and acquisitions, dispositions, financial reporting, strategic planning, bankruptcy and reorganization, dispute resolution, litigation, and others.
Business Valuations and Advisory Service:
Valuation services include:
- Tangible asset valuation
- Fairness opinion
- Share-based payment valuation
- Business interests valuation
- Impairment test
- Intangible assets valuation (also includes purchase price allocation)
Advisory services include:
- Transaction advisory
- Fair value assessment for financial reporting
- Fund portfolio assessment
- Risk assessment
Business valuation helps through valuation opinion or valuation consulting services for the valuation of business aggregates or enterprises.
The need for business valuation:
It falls under different categories, such as:
- Tax reporting
Charitable donations, gift and estate tax, c-to-s conversions
- Transactions
Buy-sell agreements, exit planning, equity financing
- Financial reporting
Goodwill impairment testing, purchase price allocation, portfolio valuations
- Litigation
Shareholder disputes, marital discord, economic damages
Typical demonstrations:
Estimates of fair value of business enterprises in terms of their financial statements in accordance with the advisory issued by the regulatory authority.
Intangible asset valuation
Valuation opinion or valuation consulting services for tangible assets (individual or multiple) or intellectual property or liability, where valuation can help with:
- General business
- Transaction planning
- Financial statement
- Tax reporting
- Sale or purchase of assets
- Secured financing/refinancing
Demonstration includes:
Valuation in terms of a unit’s financial reporting requirements concerning to an external audit for fair value measurements.
Valuation or estimate of persisting life of assets (such as individual intangible or intellectual).
Fairness opinion
Fairness opinion helps Board of Directors deliberate the purchase or sale of assets or business interests. There’s a presumption that Board of Directors will consider this fairness opinion to make a purchase decision. Also, the fairness opinion may be needed by third-parties, or it may be needed in various publications or to general public.
Fair value services are different kinds, and include:
- Valuation analyses are needed regarding articles of association, by-laws, or other forms of shareholders’ agreements.
- Analyses regarding tax mitigation or planning.
- Valuation required for contracts under parties or for dispute resolution
Valuation services are also provided in connection with fair value studies and fairness opinions. In that matter, it considers legal or statutory requirements. It is based on unique or nonstandard valuation procedures. For these services, specialised knowledge and experience is required.
Approach followed by business appraisers to determine value
Valuation consultants in India follow different approach for valuation:
- Market approach
It includes valuation of a company on the basis of similar publicly-traded companies and sale or merger transactions of companies with comparable values.
- Income approach
The approach is used to measure the profits that may come from investing in the company against a certain value for calculating the risk associated with it. This approach also helps determine projected changes in profits, revenue, capital expenditures, and working capital needs.
- Asset approach
It’s different as it gauges the fair market value of the assets held by a company, minus its liabilities. The method is mostly used for underperforming companies, and not considered suitable for companies with substantial profits and intangible assets.
The appropriate date of a business valuation
It wouldn’t be appropriate to talk about the right date of business valuation. The valuation is the estimated worth of a company at any specific point in time. Quite similar to equity investment, the value of a company can change over a period of time because of its various internal and external factors. Consequently, updated business valuation is required for various matters in future, as needed.
More than one value for a business
It’s a reality that a business can have multiple values at one point of time. Value could be the reflection of what a buyer and seller agrees upon in a transaction. In general terms, a business may appear less valuable to a buyer with no synergistic benefits as opposed to a strategic acquirer that can foresee greater profits. Furthermore, majority ownership of a business offers more value than a minority with less control rights.
Business valuation standards in India
The Ministry of Corporate Affairs (MCA) has issues certain notifications that have emerged as the game changer in the world of Business Valuation. The provisions governing valuation (by registered valuers) has been notified by the MCA under section 247 of the Companies Act, 2013 (the Act) and The Companies (Registered Valuers and Valuation) Rules, 2017 (the Rules). These came into effect from 18 October, 2017. The valuation domain is now well regulated with the rules and IBBI coming into effect as responsible authority to perform various functions as prescribed by the rules. Initially, various classes of professional were authorised to perform valuation, which is no longer applicable now.
Why are valuation standards required?
Valuation standards are needed for various reasons:
- To set asset specific guidelines
- To bring into place global framework
- To ensure guarantee of quality
- To determine global nature of business
The Valuation standards are applied with the intention to standardize certain principles and practices to be followed by Registered Valuation Professionals in fair valuation of a company’s assets and liabilities.
International Valuation Standards (IVS)
There’s a global standard setter for valuation professionals and it is called the International Valuation Standards Council (IVSC). It’s a non-profit organization.
IVS is a benchmark for global valuation practices. It comprises of five general standards and six asset standards.
General standards
Responsible for setting requirements for conducting all valuation projects which is inclusive of setting the terms of a valuation engagement, valuation approaches & methods, bases of value, and reporting.
Asset Standards
Covers requirements pertaining to specific types of assets, such as background information on various characteristics of the asset types that have an impact on the value. It also includes other asset-specific requirements in terms of valuation approaches and methods.
Asset standards include:
- Intangible assets
- Financial instruments
- Plants and equipment
- Business and interests
- Property interests
- Investment property under construction
Valuation services in India help companies conduct valuation with the help of registered valuers to ensure all applicable standards are met.