How to Value A Company: An In-Depth Guide To The Business Valuation Process

How to Value A Company: An In-Depth Guide To The Business Valuation Process

How does one value a company?

In this article, we will discuss the business valuation process, the different methods used to value a startup and why it is important to have qualified experts when evaluating a company.

Business valuation is the process of determining the value of a company. It is an analytical procedure that assists in determining what a business, property, or asset would be worth if it were to be sold. There are many different types of businesses and assets that can be valued, but there are two basic approaches to valuation:

1) Discounted Cash Flow (DCF) Methodology

2) The Comparative Market Analysis (CMA) Methodology.

The information contained in this article will shed light on company valuation techniques and how best to value your business.

Valuing a company is not an easy task. It requires knowledge of the industry, market, and the process we at virtual auditor help and support in Startup Valuation and business valuation ,Company Valuation

The following content will help you to:

Who can perform a valuation

What is the process

How do you value a company

When and how to use valuation tools?

 

Legal View on Valuation of Shares by Registered Valuer

Introduction

The introduction of the Companies (Registered Valuers and Valuation) Rules, 2017 (“Registered Valuer Rules”) following a directive issued by the Ministry of Corporate Affairs on October 18, 2017[1] requires any company issuing securities under the provisions of the Companies Act, 2013[2] to get a valuation report from a Registered Valuer who is registered within the terms laid down under the Registered Valuer Rules and the Companies Act.

Registered Valuer

The qualifications and experience needed to become a registered valuer include membership in a recognised valuers’ association, and registration with Insolvency and Bankruptcy Board of India as a valuer. The Registered Valuer Rules under Rule 5 and Rule 6[3]also spells out in detail the requirements for becoming a registered valuer, including academic requirements, experience requirements, and the registration process itself. The valuers are also required to not do any asset valuations for three years before being appointed or for three years after they are appointeda valuer if they have any direct or indirect stake in those assets.

Responsibilities and Obligations of a Registered Valuer

UnderSection 247(2) of the Companies Act,[4] a registered valuer is obliged to do the following things. Firstly, they must make a fair, accurate, and unbiased assessment of assets that may be evaluated.  When executing the duties of a valuer, the registered valuers must use caution. They are also required to estimate according to any regulations that may have been specified, and they cannot take any part in the appraisal of any assets, whether direct or indirect, in which they have a financial interest at any point during or after the valuation process.

Further, Section 247(2)(c) of Companies Act[5] states that a registered valuer must conduct valuations in accordance with the Valuation Standards that the Central Government notifies as necessary.Until the Central Government notifies the Valuation Standards, a valuer must make values in accordance with (a) a globally recognised valuation methodology; (b) valuation standards approved by any professional valuation organisation; or (c) valuation standards defined by Reserve Bank of India, Securities and Exchange Board of India or any other statutory regulatory authority.

As a result, all valuations required by the Companies Act must now be performed in conformity with the Rules using a procedure described such as:

  • a valuation approach that has gained widespread acceptance around the globe.
  • any valuation professional organisation’s valuation guidelines; or
  • Reserve Bank of India, Securities and Exchange Board of India or other statutory regulatory bodies who may specify valuation norms.
  • according to Rule 16(1) of the Registered Valuers Rules,[6] which allows the Central Government to announce how assets and corporations must be evaluated under the Companies Act.

Assets coming under the purview of Registered Valuers

Land and building valuations, plant and equipment valuations, and securities and financial asset valuations may all be done by registered valuers. They can register to value all three types of assets, but they can only value the assets for which they hold a registration

Best Method for Startup Valuation

 

In theory, there is no best method for valuation of a startup. However, there are many methods that you can use to determine the worth of a startup. The most common methods include:

  1. Comparative Sales Analysis Method
  2. Comparative Company Analysis Method
  3. Discounted Earnings Method
  4. Market Approach Method
  5. Income Approach Method
  6. Convertible Securities Valuation Method

How to Value A Company: An In-Depth Guide To The Business Valuation Process

What is Pre Money Valuation

Pre-money valuation is the valuation of a business before investors inject their money.

Pre-money valuation is the valuation of a company before any investment has been made. For example, if someone had an idea for a software company and had $10,000 to invest, they could raise $100,000 by convincing people to invest in their business. The pre-money valuation would be $100,000 (original capital) + $10,000 (investor’s contribution) = $110,000.

The pre-money value of a company is capped at 1x its post-money valuation. For example if Facebook was worth $50 billion originally and someone invested another $2 billion in it then its pre-money value will be capped at 1x$52 billion which equals about $ 52 billion

What is post Money Valuation

Post Money Valuation (PMV) is a method for valuing a startup company. PMV is an important concept in venture capital and private equity investing.

PMV can be calculated by multiplying the post-money valuation we get from this formula:

PMV = (Pre-money valuation – Cash and cash equivalents) x Owners’ equity.

It’s also important to look at the pre-money valuation, which is calculated by:

Pre-money valuation = Value of unissued shares + New funds raised – Debt

The post money valuation takes into account new investments, such as debt financing, new shares issued by the company and shareholder dilution. It also includes potential future investments such as employee stock options which may not be included in the pre-money calculation.

[1] Published in the Gazette of India, Extra., Part II, Sec.3, No. 1316 (E), dated 18th Oct 2017.

[2]The Companies Act, 2013, Act No. 18 of 2013, Acts of Parliament (India).

[3]Rule 5, Rule 6, The Companies (Registered Valuers and Valuation) Rules, 2017.

[4]Section 247(2), of the Companies Act, 2013, Act No. 18 of 2013, Acts of Parliament (India).

[5]Section 247(2) (c), of the Companies Act, 2013, Act No. 18 of 2013, Acts of Parliament (India).

[6]Rule 16 (1), The Companies (Registered Valuers and Valuation) Rules, 2017.

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