Valuation-Incremental Values without any tangible Merit
Warren Buffet: “Price is what you pay. Value is what you get.”
A business valuation provides the management of business with numerous facts and figures pertaining to the actual worth or value of the company in terms of market competition, asset values and income values. With the surge in business activities, valuations have occupied the centre stage, whether it is a start-up or a big corporate house, valuations is pervasive. Merely possessing the theoretical knowledge on the subject will not suffice as it is like an applied research wherein every element of valuation has a practical relevance. Moreover, depending on the magnitude, nature and scale of the business different valuation approaches needs to be embraced.
The relevance and importance of business valuations in various business and investment decisions as well as in Company Processes involving restructuring of Organizations through schemes of amalgamations & mergers is growing. There is a current requirement for treating valuation as a specialized discipline in accordance with defined statutory framework for academic, institutional and regulatory aspects.
It is becoming difficult to predict the future, yet financial decision ought to be taken. The soundness of financial decisions is critical to the success of corporations. Therefore, every financial decision is tested in terms of value creation. The valuation is the epicenter of financial decision-making.
Keeping in mind the complexities of business that are arising in the fast changing financial world today, the New Companies Act, 2013 has emphasized the valuation to be conducted by experienced professionals on terms and conditions as may be prescribed by the Audit Committee or Board of Directors.
Business valuation requires a working knowledge of a variety of factors:
- Professional judgment and experience
- Recognizing the purpose of the valuation
- The value drivers impacting the subject company
- Understanding of industry, competitive and economic factors
- Selection and application of the appropriate valuation approach (es) and method(s).
There are distinctive factors and scenarios involved before contemplation to move ahead with a restructuring transaction involving acquisition of a Target Company. Identifying the red flags and assimilating the required information as much as possible is essential to analyze the relevant aspects of the potential acquisition for due diligence programs, to make well informed decisions.
Key Facts of Business Valuation:
- Price is not the same as the value
The Value of a business, by whatever valuation method it is obtained, is not the selling price of the business. Value is an economic concept based on certain data & assumptions, however, Price is what a Buyer is willing to pay keeping in consideration the Economic and Non-Economic factors which cannot be quantified.
- Value varies with person, purpose and time
The Value is a subjective term and can have different connotations meaning different things to different people and the result may not be the same, as the context or time changes.
- Transaction concludes at negotiated prices
Though the value of a business can be objectively determined employing valuation approaches, the value is still subjective, dependent on buyer and seller expectations and subsequent negotiations and the transaction happens at the negotiated price only.
- Valuation is a hybrid of art & science
Valuation is more of an art and not an exact science. The Art is Professional Judgment and Science in Statistics. Mathematical certainty is neither determined nor indeed it is possible as the use of professional judgment is an essential component of estimating value.
Valuation is a useful metric in the private markets but it should be arrived at after considering the factors affecting the valuation of the company in current and projected years. The due diligence should be performed before attaining the final valuation to protect the interest of the investors willing to invest in the company.
“Your Value is your value, not your multiple or your valuation”
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