DIFFERENT APPROACHES TO BUSINESS VALUATION

Analysts use a wide spectrum of models, ranging from the simple to the sophisticated. These models often make very different assumptions about the fundamentals that determine value, but they do share some common characteristics and can be classified in broader terms. There are several advantages to such a classification as such classified items make it is easier to understand where individual models fit in to the big picture, why they provide different results and when they have fundamental errors in logic. For whom do we value? The fundamental role of valuation is to offer a base for negotiation between buyer and seller. It has a great repercussion that can affect the whole financial and strategic dynamics of decision for which the valuation is being conducted. However, an inclusive list of entities that are presumed to be affected by wrong or improper valuation will help understanding the role of valuation. Shareholders — who provide capital to the business;
•The company itself — they may become a takeover target or the prospective acquirer of the target company or may merge with another company;
•Financial experts — who help in financial decision making;
•The buyers of property and business — who help in creating orderly market;
•Banks and others—who provide loan by taking the property or financial assets like equity shares as a collateral;

1. DIFFERENT APPROACHES TO BUSINESS VALUATION

2. DIFFERENT APPROACHES TO BUSINESS VALUATION Analysts use a wide spectrum of models, ranging from the simple to the sophisticated. These models often make very different assumptions about the fundamentals that determine value, but they do share some common characteristics and can be classified in broader terms. There are several advantages to such a classification as such classified items make it is easier to understand where individual models fit in to the big picture, why they provide different results and when they have fundamental errors in logic.

3. STAKEHOLDERS OF VALUATION For whom do we value? The fundamental role of valuation is to offer a base for negotiation between buyer and seller. It has a great repercussion that can affect the whole financial and strategic dynamics of decision for which the valuation is being conducted. However, an inclusive list of entities that are presumed to be affected by wrong or improper valuation will help understanding the role of valuation.

4. •Shareholders — who provide capital to the business; •The company itself — they may become a takeover target or the prospective acquirer of the target company or may merge with another company; •Financial experts — who help in financial decision making; •The buyers of property and business — who help in creating orderly market; •Banks and others—who provide loan by taking the property or financial assets like equity shares as a collateral;

5. •Mutual funds and Hedge funds, Private Equity Players, Venture Capitalists, etc. — who heavily invest in listed and unlisted companies and / or securities; •Insurance companies — who provide risk mitigating products and invest in insecurities •Governments — who buy products and services and deposit money with banks, mutual funds and others and / or participate in equity capital as a co-investor or qcquirer . •Whole economy — a robust banking system is the necessary for the economy to move. Global financial crisis (GFC) has reminded us the crucial significance of the issue of valuation. Fair value accounting has been blamed as one of the main reasons behind GFC .

6. KEY AREAS OF VALUATION Globalisation has enhanced IT capabilities, all pervasive role of the media and financial analysts and growing awareness of investors have rendered the situation more complex. Mergers, acquisitions, disinvestments and corporate takeovers have become the order of the day across the globe and are a regular feature today. Mentioned below are certain major areas of decision making where valuation plays a key role. •Valuation of equity share in the primary, secondary as well as derivative market; •Private placement of equity shares; •Corporate restructuring and turnaround; •Secured lending including project finance; •Securitization and other debt instruments; •Implementation of Basel-III recommendation; •Portfolio management - Mutual fund, hedge fund and professional investors like PE, VC and Angels;

7. VALUER There are different types of providers of valuation services. Like International Financial Reporting Standards (IFRS) for accounting, and reporting, there is no single consistent valuation standard applicable across the world. In USA, UK, Canada and other developed countries the valuation service provide there exist professional institutes that provide necessary education training for valuation services and the profession is regulated to a large extent. In India, valuation profession is yet to be regulated; there is no specified qualification for performing valuation. As of today, the profession is fragmented and may be considered at its developing phase. This probably could be the reason, why there is lack of clarity, consistency, transparency and quality in valuation reports.