Do You Know The True Value Of Your Business?

As an individual, we often calculate our net worth which is simply our assets less debts/loans, but as entrepreneurs we ponder over the question “what is the true value of my business?”. Every entrepreneur has an idea about the value of fixed assets owned by their business but is that the only value that a business has?

In simple terms, Business valuation is defined as the process of ascertaining the “Economic Worth” of a company based on its business model and external environment. Calculating the value of a business is not easy as it involves the inclusion and computation of a large quantity of data.

Here we would like to share our views to the following questions

  • Importance of knowing the true value of your business..?
  • Factors considered in valuing a business..?
  • How to value your business..?

Importance of knowing the true value of your business

    Entrepreneur’s perspective:

  • Ideally an entrepreneur should analyze the worth of his business periodically. This information could be helpful in any event of change in business ownership; an external finance is required for restructuring or expansion, an opportunity to merge arises or an exit strategy is being contemplated or when shareholders are quitting or a new partner is walking in and needs to know his share of investment etc.
  • In this competitive world, no business can sustain without growth. Growth of business requires, among others, identifying the favorable factors for the business and finding potential investors to partner with. For an investor to invest, it is necessary to evaluate the value of business in the most realistic manner. Thus, a valuation report is a requisite tool to attract potential investors.

    Investor’s perspective: 

  • To understand the value of investment opportunity. A valuation helps the potential buyer/investor to forecast the approximate rate of return on investment.
  • Investors get a chance to understand the business plan in detail and challenge/negotiate potential risk factors that might have an impact on the business.

Factors considered in valuing a business

Though the factors that ascertain the true value of a business varies from case to case, following are a few of the important factors to be considered:

  • Nature of business, its history, prognosis and growth capability
  • Promoter and management strength
  • Uniqueness/innovation element of the product/service if any
  • Competitive landscape
  • Customer loyalty and relationship with suppliers
  • Historical financials and future predictions
  • Economic outlook in general (including industry growth potential)

How to value your business

Listed below are the generally acceptable methodologies of valuation:

1. Asset approach : Usually applied for valuing companies that have grown to their peak stage or companies that are on a downward growth phase and real estate & investment companies that have a huge asset base.

  • Book value method- based on the value of assets and liabilities as appearing in the Balance Sheet.
  • Replacement cost method- The current cost of setting up a plant or buying an asset of similar size and capacity is considered and applied to arrive at the value.
  • Liquidation value method- The value that the various assets would fetch if they are sold, is estimated to find out the total value.

2. Income approach: Based on the assumption that the present value of a business is a function of the    future earnings that the business is expected to create.

  • Discounted Cash Flow method-The future free cash flow is discounted to arrive at a present value estimate.
  • Capitalization of earnings method- A capitalization rate is used to relate between the future and current earnings.

3. Market approach or Relative Valuation method : The company/assets/transactions are compared with its peers. However, selection of comparables is a critical task as this is subjective and various factors need to be considered.

  • Comparable companies multiples method-The market multiples of equivalent companies are calculated and applied to arrive at the business value.
  • Comparable transaction multiples method – Here the transactions that happened in the immediate past or is currently happening in similar industry is taken into account and is commonly used in the case of M&A.
  • Market value method- Suitable for listed companies that have frequent nationwide trading of its shares where the implicit potential of the company is reflected in the market value.

Rather than depending on one method, two or more methods could be considered which must be reconciled with each other to arrive at a value conclusion. As there are numerous methodologies involved, identifying the right valuation method that suits the industry based on its size, regulatory environment, area of operation etc can be best left in the hands of a financial expert. Accurately valuing a business is often a tedious and challenging process. It is a subjective procedure that depends on the professional experience of the valuer rather than a science based on theoretical studies and principles.

 

Contact us at www.matchvalley.com for a free consultation regarding your business valuation.

E-mail : hello@matchvalley.com

Mob : +91 8593939977

 

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Planning to raise investment for start-up??

Raising funds is an important aspect in any business and that becomes a crucial aspect for start-ups, particularly. Due to various favorable policies from Government and also recognizing the opportunities of business in current socio-economic scenario, it can be noticed that startups are on a rise. Even though the founders will be well equipped with the idea for start-up, the key challenge comes when this has to be converted into a business plan and funds are to be procured from investors. Here are a few things to keep in mind:

  • Plan it ahead: In many cases, organizations seek fund when they start incurring loss or when they are not fully prepared/aware of the implications of fund raising. It is always advisable to raise funds at the right time to get a good deal. Determining the right time depends on the prudence of the management. It could commence when a potential business opportunity can be tapped or to phase expansions. Investors will be interested in a business which has proven a credible operational model and have scope for expansion. In addition, there could be various legal challenges to raise the money (e.g. existing legal structure of the organization). Hence, it is better to have a discussion with professional consultants on what all steps are to be taken in advance.

  • Have experienced people on board: A credible top management will have a positive impact on the investors. Most people will also prefer to co-invest with someone who has a proven track record in management and handling finance.

  • Clean up financials: While raising funds for startup, the value of the company will come into discussion. To get the maximum value out of the deal, reduce liabilities and bring transparency to accounts. Maintaining proper books of accounts and compliance with local regulations is necessary in this aspect. The assets and liabilities of the company will definitely be taken into consideration and analyzed in detail, while arriving at a value.

  • Financial projections: There is a misconception that higher revenue projections will help in raising more fund. Conversely, the more realistic the projections are, the better chances of raising fund. In this scenario, a financial model will be very relevant. It helps in understanding the profitability and returns for a project under various scenarios. Understanding a business gives confidence to the promoter and he will be able to determine how much value can be negotiated for dilution of shares. A financial model will help to analyze and compare various parameters of the project in depth and identify the potential opportunities and threats. This will also help in answering various queries of the investor.

  • Qualitative factors: There are a lot of factors which a business can contribute, which cannot be quantified. It includes (but not limited to) improvement of economic scenario, more employment opportunities. It will be beneficial for the investor to understand the positive change they are bringing to the economy and society.

  • Amount to be raised: The promoter should have a clear idea on the amount of fund to be raised and how it is going to be utilized. This will get scrutinized and challenged at various stages of fund raising. If possible, plan the fund raising in tranches – estimate the total fund required, identify the minimum amount required for a boost, raise it, prove it and then go for the next rounds of investments. This approach will give more confidence and better planning for the promoter regarding fund utilization and more assurance to the investor regarding credibility of the promoter.

  • Competitors: Be well aware of the market and competitors. This helps in understanding the industry trend and performing a SWOT analysis, before any expansion plan.

  • Start-up valuation: Though various methods of valuation are in practice, commonly followed approach for start-up valuation is Discounted Cash Flow method. This involves estimation of projected cash flows and discounting it using the cost of capital to arrive at the enterprise value. It is ideal to be prepared with the business valuation using a standard base, as this will be discussed at various stages of fund-raising.

There are various other factors also to be considered before raising funds, which includes determination of an optimum capital structure, various funding options, current performance of the company, and so on. Considering that investing in a start-up is a highly liquid investment for an investor, diligent planning and care should be exercised. Like all major events, necessary time and effort should be spent right from the planning stage itself to get the best deal.

Contact our experts at Match Valley Capital Partners (Mob: +918593939977, E-mail: hello@matchvalley.com) for a free consultation on getting your pitch deck ready, preparing /reviewing a financial model and for startup fund raising.

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Investing In A Business In India – Points To Consider

There are several reasons for NRIs to invest in India the major three being (i) to build up a strong financial security when they return to their homeland for good (ii) contribute to creating employment opportunities and (iii) contribute to economic growth of the country. Though NRI now have become a major segment of investors into India and many of them are successful, some of them have faced failures because of various reasons, including being duped by the promoters. In this article, I try to highlight a few points that an investor should look into before they conclude the investment deals.

 1.Know your Industry

Before investing into a venture, it is really important to do a market study of the sector and understand the industry. It is often seen that NRIs are introduced to a concept or a business idea and are taken to a fictitious world of imagination of the promoters, in which everything is perfect with high returns and no provisions for plan B or contingencies are provided. Before investing, it is important to view the initiative in the most realistic way and identify all issues of the particular industry, so that a solution strategy, if deciding to invest, can be worked out.A market study by an independent agency can help the investor in obtaining a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) of the industry into which he is investing.

2. Project Feasibility Report:

Project reports form a crucial part in evaluating any business. Technical, operational and financial aspects must be studied in depth while evaluating any deal.Where the investment is made into a new venture or into a new idea, the investor should take care to review the project report in depth and the same should be analyzed and critically approached by a subject/ technical expert. The promoters should be able to provide a proper financial road map and convince the investor that the cash burn is justified and the revenue targets are achievable. 

3. Valuing the business:

The pace at which technology has grown in the recent years can be understood from the fact that investments are now made on an idea of a person (promoter), and not on a product as it once used to be. Many a times it is difficult to put a proper value for the idea due to its uniqueness and lack of comparable data. Valuing a business helps in understanding the estimated worth of the company as well as the percentage of equity stake an investor can acquire in the company.There are different ways to value a business such as discounted cash flow method, comparable transaction method, multiples method, net assets method, etc. A financial model is built choosing one of these valuation methods which can aid the investor in understanding many financial indicators such as return on investment, break-even point etc. Choosing a method would depend on several factors including the nature and stage of the business, type of industry etc. In many cases valuation using different methods are taken and decision is made on a best judgment. While the above methods are acceptable methods of valuation, it is important for the investor to sit with his team to analyze the assumptions and figures of the financial model to ensure that they are correct and achievable.

4. Due Diligence

Where the investment is made into an existing business, it is advisable to do a due diligence of the business by an independent authority directly reporting to the investor. Due Diligence helps an investor to assess the performance of the entity in the preceding years, details regarding unsettled disputes, unsettled outside & statutory liabilities etc. Due Diligence further helps the investor to compare the information gathered against that provided by the promoters and assess the genuineness of the business.

5. Documentation

A proper Memorandum of Understanding (MoU) should be entered into between the promoters and investors that clearly states the amount of investment, the terms and conditions of investment. The MoU should also list down the various tranches in which the investments will be made and the milestones that the promoters should achieve before each tranche. It would also be advisable to review the MoU by a competent legal authority to ensure that interest of the investor is safeguarded.In addition to the MoU, shareholder agreement, term sheet, byelaws of the company etc all form an important part of documentation .

6. Know your Promoters

Ensure that the promoters of the venture is trust worthy and reliable.  The investor should do a proper back ground check of the promoters. It is the promoters that carries out the day to day business of the entity and their complete involvement in the project is critical to its success.

7. Portfolio Management

It is always wise to diversify the investment rather than investing the entire amount into one idea. Such an approach reduces the risk the investor is exposed to. Risk-averse investors should also consider the options of introducing the fund as debt or preference shares. The method of investing should be selected after understanding the risk and return parameters. 

8. Exit Strategy

It is ideal to have an understanding on the exit strategy as well. Even though it may seem odd to be discussing about exit strategy at the commencement of a business, there should be an alignment of interests between the investors and the founders and planning is required in advance. For example, if the company plans to get listed in stock market, they might prefer to follow some accounting regulations from initial stage.

9. Governance Report

Once an investment is made, monitoring is necessary to ensure that the promoters are on track with the idea development and the cash burn are as budgeted. As the investor is not involved in the day-to-day management of the entity, he will not be able to monitor the performance of the entity. A monthly or quarterly governance report is a solution. The report can either be a summarized dash board with major findings on the performance of the company or a detailed internal audit report. To ensure reliability, the governance report should be prepared by an independent agency.

Contact our experts at Match Valley Capital Partners (Mob: +918593939977, E-mail: hello@matchvalley.com) for a free consultation on getting your pitch deck ready, preparing /reviewing a financial model and for startup fund raising.

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Diversify with a simple strategy – ‘Growth by Acquisition’

With a state like Kerala, has anyone wondered how successful an acquisition can lead to? People have started to put faith in the strategy – ‘Growth by Acquisition’ as this has led to companies focusing on scalability rather than negative approach to market. Going by the success story of Lulu Groups, one of the leading business conglomerates that initially operated as a family business venture. From humble beginning as an importer of frozen products from US and Europe, the group has steadily grown into a towering presence in the business & industrial landscape of Kerala. Through acquisition, the group is engaged in a diversified range of business activities, which expanded, recently by the acquisition of the Great Scotland Yard in London and Abad Airport Hotel in Cochin. This shows the importance on why Corporates need to have a closer look on the term – ‘Mergers & Acquisition’.

Among the myriads of major acquisitions in the country, the state of Kerala witnessed a successful acquisition, which has turned the tide of IT revolution towards the state. Profoundis Labs, a Kochi based Startup has been acquired by FullContact, an American software company. This marks the first time a US based company acquires an IT product firm in Kerala.  This brought about a boost in Kerala’s nascent start up industry as another company based in Trivandrum, LeadFerry Technologies have also garnered interest from two big firms in the US, one being a Fortune 400 Company and another a successful start up. The road ahead seems to be bright for IT companies in Kerala but what we are stressing here is – ‘Acquisition’ should be an important part of corporate life going forward!

Does this happen only in Kerala? No. Cause Mergers & Acquisitions have been bread and butter for many of the leading business firms in India. This leads us to one of the most defining period in Indian Sports Network. Sony Pictures Network India (SPN) has now announced that it has entered into a definitive agreement to acquire TEN Sports Network from Zee Entertainment Enterprises Limited (ZEE) and its subsidiaries for 385 million U.S. dollars. This acquisition will add South Asia's leading sports network to SPN's existing portfolio of channels thereby emphasizing the importance to scale by acquiring a leading network and extending their network in the global market.

These successful Mergers & Acquisition have brought about the importance of companies like Match Valley Capital Partners in the state. Having been equipped with the right mix of Corporate Lawyers, Chartered Accountants, Business Brokers, and Experienced Professionals, Match Valley have successfully sauntered into the world of Business Broking giving corporates various perspectives on how to grow. Watch for this space where we would talk about how life is for Business Brokers when we are entrusted with reviving Sick Units and drawing interest from Domestic and Foreign Investors.

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Capital Gain on Slump Sale

Slump sale basically means transfer of one or more undertakings as a result of the sale for a lump sum consideration, without values being assigned to the individual assets and liabilities. The evolution of phrase ‘slump sale’ under Income Tax relates to frequent mergers, demergers and other forms of restructuring in the corporate world. Before A.Y. 2000-01, capital gains made on sale of an ‘undertaking’ were chargeable to tax under S. 45 of the Income-tax. Though it was difficult to determine the cost of acquisition / improvement and date of acquisition of the ‘undertaking’, as required under S.48, however gain on sale of undertaking was chargeable to tax under the head capital gains. From A.Y. 2000-01 onwards, new S. 50B of Income Tax was introduced which lays down special provisions for computation of capital gains in the case of a slump sale.

a) Meaning of ‘Slump Sale’ under Income Tax

As per S.2(42C) of Income Tax Act, 1961, unless the context otherwise requires, the term “slump sale” means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

Explanations:

1. For the purposes of this clause, “undertaking” shall have the meaning assigned to it in Explanation 1 to clause (19AA).

2. For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.

b) Computation of Capital Gains from Slump Sale

Special provisions relating to computation of capital gains from ‘Slump Sale’ under S.50B of the Income Tax Act, 1961, are as under:

(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which the transfer took place.

Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

(2) In relation to capital assets being an undertaking or division transferred by way of such sale, the “net worth” of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48.

(3) Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288, indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section.

Explanations: 1. For the purposes of this section, “net worth” shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account. Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.

2. For computing the net worth, the aggregate value of total assets shall be (a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of sub-clause (c) of clause (6) of section 43; (b) in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, nil; and (c) in the case of other assets, the book value of such assets.

c) Form of report of an accountant under sub-section (3) of section 50B

In relation to form of report of an accountant relating slump sale transaction, the Rule 6H of Income Tax Rules, 1962 provides as under:

The report of an accountant which is required to be furnished by every assessee along with the return of income, in case of slump sale, under sub-section (3) of section 50B shall be in Form No. 3CEA.

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