BusinessValuationBasics-10octSeminar

7/29/2019 BusinessValuationBasics-10octSeminar

1/18

BUSINESS VALUATIONBASICS-Nuts and Bolts

CA RAJIV SINGH, FCA,LIFA(USA),CISA(USA)

Joint Technical Director: Valuation Course(ICAI) & Master of Business Finance

Course


2/18

Agenda Introductio

Value vs Price

Efficient Market Hypothesis

Business Valuation how to define?

Business Valuation Principles Business Valuation Process

Valuation Purpose

Standard of Value

Premise of Value Valuation Case Laws

Valuation Myths


3/18

BUSINESS VALUATION Introduction

Some men know the price of everything

and the value of nothing - Oscar Wilde

Its better to be roughly right than to be

precisely wrong - J.M. Keynes

Its stupid the way people extrapolate thepast and not slightly stupid, but massively

stupid -Charlie Munger


4/18


Appraisers have a value in mind before they start the process

and try to back into it AswathDamaodaran, Jan 14,2009

There is a vast difference between understanding somethingwell enough to buy it as opposed to understanding it well

enough to sell it. Zig Ziglar,Secrets of Closing the Sale, 1984

The numbers are never a whole story , only a startingpoint.

We must always remember that market research, no matter howwell done, is based on the past. We are always susceptible todiscovering a truth whose time has gone.

Mark A. Johnson, The RandomWalk and Beyond, 1988


5/18


Are Financial Models solution for

forecasting?

Financial Models use scenario analysis andsubjective probability to get expected

value.

What this expected value is?

Functional equivalent of the statisticianwho drowned in water which was, onaverage, only 4 feet deep.

He forgot that the range of depth was


6/18

Value vs Price

General definition of value as perIVSC

An economic concept

An estimate of the likely price at a

given time in accordance withdefinition of value

Not a fact

Price is the amount of money or otherconsideration asked for or given inexchange of something


7/18

Value vs. Pricevalue

Not a static figure

Nothing calledprecise value

Arrival oftransaction notnecessary

Fundamentals arethe key

Always involveseconomicbenefits

Value is shouldbe price - thebasis of

price

A static figure

Always precise

An outcome of a

transaction May not be driven

by fundamentalsalways

Includes economic& non-economicfactors

May not look on

valuation


8/18

Business Valuation-how todefine ?

Business Valuation

An act or process of determining thevalue of a business, businessownership interest, security or

intangible assets{The International Glossary of BusinessValuation Terms}

Alternative Definition

Business Valuation is a logical,defendable process of arriving at theopinion as to the worth of a businessgiven the information available,

assumption & limiting conditions as


9/18

Purpose of ValuationPurpose of valuation Examples

Valuation for transactions Business purchase , Business sale, M&A (Mergers

& Acquisition), Reverse merger, Recapitalization,

Restructuring, LBO (Leverage Buy Out), MBO

(Management Buy Out), MBI (Management Buy In),

BSA (Buy Sell Agreement), IPO, ESOPs, Buy back

of shares, Project financing and others

Valuation for court cases Bankruptcy, Contractual disputes, Ownership

disputes, Dissenting and Oppressive shareholder

cases, Divorces cases, Intellectual property

disputesand

other

Valuation for compliances Fair value accounting, Tax Issues

Valuation for planning Estate planning, Personal financial planning, M&A

planning, strategic planning


10/18

Level of normal earning power and profitability inthe employment of assets as distinguished fromthe reported earnings, which may be, andfrequently are, distorted by transient influences

Dividends actually paid or the capacity to pay

such dividends currently and in the future

A realistic expectation about the trend linegrowth of earning power

Stability and predictability of these quantitativeand qualitative projections of the future economicvalue of the enterprise

Graham and Dodds Security analysis, fifth edition, Tata McGraw Hill,

page 41 ,42

Intrinsic Value or Fundamentalvalue


11/18

Purpose Standard of Value

Tax related

Financial Reporting

Security Analysis

Going private, shareholders

dissent & oppression, dissolution

Divorce

Buy or Sell

M & A

IPO

Property

BSA

Bankruptcy

FMV

Fair Value

Intrinsic Value

Fair value

Fair value or FMV or Investment

Value

FMV

Investment Value

FMV

MV

As agreed between parties

FMV or MV


12/18

Before 1983 Delaware Block method (DBM)

A mechanical combination of three approaches net asset, market and earning

Step I: determine the value under threeapproaches.

Step II: assign a percentage weight to thevalues derived in step I consideringnature of the business.

Step III: calculate the weighted average ofthe three valuations -this isthe fair value or appraised value of

Valuation case laws


13/18

After 1983 Weinberger

Judicial birth of DCF & demise of DBM

more liberal approach must include

proof of value by any technique ormethods that are generally consideredacceptable to financial community

Did not prohibits DBM but allowed othermethods

Valuation case laws


14/18

Fair value must take fairness & equity

Minority discount should not be appliedfor fair value in case of dissenting

stockholders

Lawson Wheaton


15/18

1.Mahadev Jalan , wealth tax, 1972 (SC)

Break-up value for going concern is norcorrect. Court laid down principles of

valuation

2.Kusumben Mahadevia, Gift Tax1979(SC)

Reinforced principles laid down in the MahadevJalan

Valuation case laws India


16/18

3.Bharat Hari Singhania , wealth tax,

1994 (SC)

Court recognised practical difficulties inapplication of principles of Mahadev Jalan

4.HLL, Companies Act 1994(SC)

All or combination

of methods can be applied for fair value



17/18

5.Miheer Mafat Lal , Companies Act,

1996 (SC)

Fair exchange ratio based on manageableprofit method, net worth or break up method

and market value accepted

6.Mrs Renuka Dalta, Companies Act

2003(SC)

DCF is acceptable

Combination of methods accepted

Intrinsic value cannot include control



18/18

Valuation is objective

Valuation is a science

Valuation gives precise number

A single valuation serves more than one purpose

A complex financial model gives better valuation

Growth in earning increases value

Valuation is worthless as it involves lot of

assumptions

All valuation approaches and methods apply in all

situations

There is single definition of value

Valuation Myths

BusinessValuationBasics-10octSeminar

Documents

Transcript of BusinessValuationBasics-10octSeminar