BUSINESS VALUATION- Equity Value and Enterprise value

Valuation is not an objective exercise, and any preconceptions and biases that an analyst brings to the process will find their way into value”
Simply defined, a business valuation is an activity conducted towards rendering an estimate or opinion as to the fair market value of a business interest at a given point in time. Generally, when valuing a business, a notional transaction is assumed, that is, one which has not been subjected to the bargaining process. Like accounting, valuation is an art rather than an exact science, and a properly conducted valuation is nothing more than an expression of informed opinion, which is based on fact of past financial performance and judgmental estimation for future. By their very nature, valuations are not precise. Consequently, valuation estimates and opinions are generally stated as a range of values. Examples of when a business valuation may be required include any or more of the following instances:
•Mergers and acquisitions;
•Business restructuring;
•Initial public offering and listing of equity shares in stock exchanges;
•Shareholders’ disputes settlement;
•Purchase / sale of a business interest and step up acquisitions;
•Non-arm’s length transaction;
•Disgruntled minority shareholders’ actions;
•Damae claims;
•Estate planning;
•Deemed disposition at death

1. BUSINESS VALUATION

2. Equity Value and Enterprise value “Valuation is not an objective exercise, and any preconceptions and biases that an analyst brings to the process will find their way into value” Simply defined, a business valuation is an activity conducted towards rendering an estimate or opinion as to the fair market value of a business interest at a given point in time. Generally, when valuing a business, a notional transaction is assumed, that is, one which has not been subjected to the bargaining process. Like accounting, valuation is an art rather than an exact science, and a properly conducted valuation is nothing more than an expression of informed opinion, which is based on fact of past financial performance and judgmental estimation for future. By their very nature, valuations are not precise. Consequently, valuation estimates and opinions are generally stated as a range of values.

3. Examples Examples of when a business valuation may be required include any or more of the following instances: •Mergers and acquisitions; •Business restructuring; •Initial public offering and listing of equity shares in stock exchanges; •Shareholders’ disputes settlement; •Purchase / sale of a business interest and step up acquisitions; •Non-arm’s length transaction; •Disgruntled minority shareholders’ actions; • Damae claims; •Estate planning; •Deemed disposition at death

4. DISTINCTION BETWEEN PRICE AND VALUE The price may be understood as ‘the amount of money or other consideration asked for or given in exchange for something else’. The price is therefore, an outcome of a transaction whereas the value may not necessarily require the arrival of a transaction. The value exists even if some assets become unable to generate cash flows today but can generate in future on the happening of some events.

5. VALUATION Knowing what an asset is worth and what determines that value is a pre-requisite for intelligent decision making. Valuation is an essential prerequisite in choosing investments for a portfolio, in deciding on the appropriate price to pay or receive in a takeover, and in making investment, financing and dividend choices while running a business. The basic premise of a valuation exercise is that the valuer can make reasonable estimates of value for most assets. The same fundamental principles determine the values of all types of assets, real as well as financial. Some assets are easier to value than others as the details of valuation vary from asset to asset and the uncertainty associated with value estimates is different for different assets. However, the core principles remain the same.

6. In case of equity shares valuation is used for 1.stock selection, 2.concluding market expectation, 3.evaluating corporate events, 4.setting up an opinion, 5.evaluating business strategies, as a communication among management, shareholders and analysts, appraisal etc.

7. BUSINESS VALUATION The art of valuation as an exercise is not just a discipline for finance professionals and investors. Used properly, it can be a powerful, perhaps the most powerful, way that managers can run their companies in an increasingly competitive world. By integrating accounting and performance measures with strategic thinking and day-to- day operations, managers can learn to take decisions that enhance their businesses and add real value. As knowledge capital becomes increasingly important, traditional financial measures such as earnings and book value are accounting for less and less of a company’s actual market price. Investors are paying great attention to non-financial factors in their efforts to assess the value of corporations.