Business Valuation - The
deal making value
Business valuation is the art and science of understanding
the value and worth of any business. Generally the promoters , investors as
well as the financial institutions wants to understand the value of business in
order to take strategic decisions like sale of business , sale of certain stake
of business, merger of business etc.
There are three
approaches to Valuation - The asset approach, the income approach & the market approach.
The Asset Approach or the balance sheet approach is
extremely useful for company with large asset base like real estate companies
with land bank and may not be very useful for service industry companies like
tech companies or e -commerce companies like Amazon, Flipkart, ebay etc. This approach is based on historical data and
does not take care of the future.
The Income Approach is useful for companies having a
promising business story and having a good potential. This approach takes care
of the future potential of business. Under this method discounted cash flow is
the most popular method which takes care of the future cash flow of business.
However this is a very sensitive model as it is based on various assumptions
like the discount rate i.e. cost of equity or weighted average cost of capital
through which the cash flow is to be discounted, the terminal growth rate and
the systematic risk i.e beta factor of listed peers. A small change in any of
these factors can drastically change the value of the business. However while
applying the DCF methodology the first and the foremost step is to validate the
projections with the help of peer companies.
The Market
Approach
The market approach in case of unlisted companies means
applying the peer listed companies multiple to our company and valuing our
unlisted company on the basis of market sentiment like PE Multiple, EBITDA
Multiple, Mcap/ sales multiple etc.
At times it confuses us which method need to be applied while
undertaking any valuation, however the best way is apply all the methods which
suits your business model at first hand and then apply relevant weight based on
the importance of the method to our business model. Applying different method
is useful as its helps in making a sanity check.
One thing is of prime importance that there are different
methods present to value a business; however the experience of the valuer play
a most significant role as his experience can guide the client in deriving a
fair value of business after looking into various aspect of business.
Thanks &
Regards
PureValue
Research Team
www.pvalueresearch.com
To persuade customers to focus on total costs rather than simply on acquisition price, a supplier must have an accurate understanding of what its customers value, and would value.
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