Valuation: How it works.

Valuation

It is a process which needs to be done to find the value of the company or the asset of the company

•  It is the process of determining the Net worth of the company or the Value of the asset.
•  It is done when the company wants to know at what price should the business of the company should be sold or to be purchased.
• Analyst do the valuation to determine whether the company’s asset is overvalued or undervalued.

Why Valuation is needed?

•  Whenever company goes into the agreement of Merger and   acquisition then Valuation is needed.
•    Whenever the company wants to take loan from the bank.
•    At the time of IPO (Initial Public Offer) Valuation is needed.
•  At the time of startup funding.

Valuation Methods:

There are many methods available for the purpose of doing valuation. The three important method that is mostly prescribed is:

1.     Comparable company analysis.

2.     Discounted Cash Flows

3.     Asset Based Valuation method

Comparable company Analysis:

Comparable Company Analysis Method Example

• In this methods the value is determined by identifying the data of the similar company that is present in the market.
• The value is determined by seeing its growth and the recent transaction that has been done in the market of the similar company.
• This method is useful only when there is a similar type of company is available in the market. If not, then this method is not useful to find the proper value of the company.
• They might look for the Price earnings ratio, Estimated enterprise value and the EBITDA of the company.

Discounted Cash Flows:

Discounted Cash Flow Example.

• In this method there is a consideration of the future cash flows which includes outflows of the cash and the inflows of the cash. 
• Then the projected cash flows is multiply by the discounting factors which is according to the market condition or the company feel that the company will grow at this rate.
• This brings all the future Cash flows to the current situation i.e. present situation.
• Then all the total of the flows sums up the Valuation.

Asset Based Valuation Method:

Asset Based Valuation Method Example

• In this method the focus of the company is on to find the Net Asset value (NAV) of the company or the Fair market value (FMV) of the asset and then in the sums of the above the Total Liabilities amount will be deducted to find the actual Valuation amount.

Other Approaches-

Cost Approach:

• In this the valuation is done by determining the what would be the cost of this firm if this will be rebuild.
• In simple word, the cost which is needed to rebuild the particular business.
• It is also known as Replacement cost.

While I was analyzing the previous reports of the valuation of many companies at the time of work, so I found that every method has some kind of drawbacks and Benefits that to be taken into the consideration to find the accurate value. I want to highlight some points that I have identified:

In the Discounted Cash flow method;

o   It is mostly used method in terms of doing the valuation of the company and mostly startup funding valuation is done by this method.

o   This method is only useful when there is a detailed projected cash flows is given by the management of the company whose valuation is in the progress.

o   According to the latest amendment in the Income Tax Act, Rule No. 11UA, now only Category 1 merchant banker is allowed to do the valuation of unquoted equity shares through DCF method.

In the Asset Based Valuation method:

o   This is only possible if the past data is available.

o It is calculated by keeping in view the Historical Data or cost of the company.