BMS COLLEGE OF ENGINEERING

MBA DEPARTMENT

ASSIGNMENT PAPER ON: CORPORATE VALUATION

SUBMITTED TO SUBMITTED BY

Dr. Shubha B N Deepa R. Naik

Professor 1BM15MBA20
MBA Department MBA Department

DATE: 13-6-2017
 BMS COLLEGE OF ENGINEERING

Department of Management Studies and Research Centre

ASSIGNMENT PAPER ON: CORPORATE VALUATION

Submitted by:
Submitted to:
Dr. Shubha B N

Professor

MBA Department

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IMPORTANCE OF CORPORATE VALUATION

Determining the true value of a business is a process called business valuation, is not just
important when the owner is looking to sell the company. Its also important for other reasons:

1. Business succession planning: Savvy business owners often arrange to transfer shares to a
partner or heir (after a triggering event, such as death, disability or retirement) through a
buy-sell agreement, which is often funded with life insurance. But before the owner can
identify the buyout price (and thus, know how much the buy-sell agreement needs to be
funded with), the value of the business must be determined.

2. The IRS needs to know the value of the business: At the death of the business owner, the
value of the business will be used to help determine estate taxes and tax basis for any future
sale.

To obtain a business valuation, business owners may wish to contract with a professional
appraiser to provide an opinion that will be viewed as independent and objective with the IRS.
The resulting business valuation then may be used in a variety of planning applications for
example, enabling the owner to sell the business at a higher sales price, or for the business owner
or his or her heirs to pay less in taxes after the sale of the business or the death of the owner.

Business valuation is used to set the fair market value of the shares of a business, in other words
to know how much the business is worth. This analysis is useful in various situations, such as a
transaction (purchase or sale of a business), tax reorganization, integration of a new shareholder
or in the context of litigation.

When comes the time to have their business valued, the owners biggest concern is to maximize
the value of it. Seeking an expert in business valuation provides not only an objective and
independent value, but also guarantees a suitable transaction in terms of taxation while making
sure that no money is left on the table.
The valuation is based on the analysis of different types of information, for instance financial
statements, budgeting, business plan, client list, salaries, etc. In addition to providing a thorough
evaluation, experts in business valuation, due to their experience and knowledge of the market,
are also able to assist with ideas for investment or acquisition projects or any other element that
could help maximize the value of a business.

While most business owners only play along when they have an offer on the table, it is quite
profitable to have ones business valued on a regular basis, for example every five years. Indeed,
a thorough and rigorous evaluation may require a period of 5 to 7 weeks. In the event of a quick
transaction, knowing the value of ones business allows one to get a realistic basis for negotiation
with the buyer.

Given the current context of retiring baby boomers and the importance of ensuring the next
generation, business valuation is particularly important in any situation of business transfer
whether small or large. In the Eastern Townships, Raymond Chabot Grant Thornton has the
largest team dedicated entirely to business valuation.

A number of stock market indicators in the United States and other countries provide an
indication of the market value of publicly traded firms. The Survey of Consumer Finance in the
US also includes an estimate of household ownership of stocks, including indirect ownership
through mutual funds. The 2004 and 2007 SCF indicate a growing trend in stock ownership, with
51% of households indicating a direct or indirect ownership of stocks, with the majority of those
respondents indicating indirect ownership through mutual funds. Few indications are available
on the value of privately held firms. Anderson (2009) recently estimated the market value of U.S.
privately held and publicly traded firms, using Internal Revenue Service and SCF data. He
estimates that privately held firms produced more income for investors, and had more value than
publicly held firms, in 2004.
IMPLICATIONS OF CORPORATE VALUATION

Knowing what business is worth and what determines its value is prerequisite for intelligent
decision making. Corporate valuations form the basis of corporate finance activity including
M&A, fund raising, sale of businesses and also to meet regulatory and accounting requirements.
Many legislations in India have prescribed valuation methodologies to be applied in specific
situations for a particular purpose but more recently, a few legislations have prescribed valuation
as per internationally accepted valuation guidelines.

Though there are International valuation standards however not much guidance is available in
India on the manner in which specific valuation methodologies are to be applied and different
valuers take different assumptions leading to difference in value conclusion. In many cases the
valuation also lacks uniformity and generally accepted global valuation practices. Thus, in the
absence of standards of business valuation in India, the valuation is more of an art based on the
professional experience and exposure of the valuer rather than science based on empirical studies
and logics

Credible valuations are critical to the efficient working of the capital markets, businesses,
government and all its stakeholders. With growing shareholder activism, importance of
independent valuations is arising all over the world including India.
Role of a valuer is to consider the facts of each case, understand purpose of valuation and
applicable regulatory norms for such transaction. Validation of the inherent assumptions of a
business model is critical in any business valuation engagement. Limitations and Assumptions
should be properly explained in the valuation report.
In our country, Valuation in itself is evolving. New concepts of Registered Valuer in
Companies Act, 2013 and Fair Value in Ind-AS are setting the tone for Indian Valuation
Standards. With the valuation process opening up in India and more debate happening on
valuations, complex valuation methods are also getting recognition as valuation is emerging as a
discipline in India.
In business valuation, variety of valuation methods typically categorized into three core
Valuation approaches (Asset, Income and Market approaches) are considered and Premium &
Discounts applied based on size and % of transaction under valuation to arrive at the Valuation for
Shareholders.
Asset Based Method (NAV)

The asset based method views the business as a set of assets and liabilities that are used as
building blocks of a business value. The difference in the value of these assets and liabilities on a
book value basis, or realizable value basis or replacement cost basis is the business value.

Adjusted Net Asset method

For Calculating the Adjusted NAV, the valuer should factor in the fair value of the assets,
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 etc.

Income Based Method

The Income based method of valuation based on the premise that the current value of any
business is a function of the future value that the Company can expect to receive It is generally
used for valuing businesses that are expected to continue operating for the foreseeable future.

Discounted Free Cash Flow Method (DFCF):

The DFCF method expresses the present value of the business as a function of its future cash
earnings capacity. This methodology works on the premise that the value of a business is
measured in terms of future cash flow streams, discounted to the present time at an appropriate
discount rate.

Market Based Method

In this method, value is determined by comparing the subject, company with its peers in the same
industry of the similar 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 there are
companies 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.

Market Value Method (For Quoted Securities)

The Market Value method is generally the most preferred method in case of frequently traded
Equity Shares of Companies listed on Stock Exchanges having nationwide trading