With $82.3 billion pending and completed M&A deals, the second quarter of 2022 continues the trend of hitting record volumes of merger and acquisition (M&A) transactions across the Indian market, according to a Bloomberg report. This boom in M&A deals has led to an increase in demand for skilled valuers and valuation services.
Valuation is a critical part of M&A activities. It helps determine the worth of a business, guide negotiations, and align the views of the buyer and seller to achieve a satisfactory and successful outcome. An experienced valuer conducts valuation for mergers and acquisitions independently and objectively scrutinizing of a range of different metrics.
Valuation for Mergers and Acquisitions
Mergers and acquisitions take place for various reasons. The main objective is to increase the size and value of the entities in the market. Valuation for mergers and acquisitions is important because it helps in estimating the economic value of the business assets and exposes loopholes like the company’s failing assets, straitened circumstances, accounting controls, and weak operating ratios that reveal low business sales compared to its total expenses.
Who is a Valuer?
A valuer is a qualified person who takes stock of the company’s financial statements, both qualitative and quantitative information.
The valuer takes into account a few key factors like business type, business products and services, the economic and political environment in which it functioned, the industry life cycle, working capital, liabilities, customer relationship, customer base, goodwill, market position and reputation, business interest, etc.
There are definite procedures outlined for valuation for mergers and acquisitions, but in practice, it can be quite an intricate process. It is of paramount importance to do the valuation of entities errorlessly to prevent financial setbacks and a debacle in the future.
Valuation Approaches
A valuer would use a combination of the following during valuation for mergers and acquisitions.
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There are essentially three important valuation approaches that valuers may apply in valuation for mergers and acquisitions. There are multiple valuation methods but we would limit our discussion to the valuation approaches in this blog –
Asset-Based Approach
The target company’s liabilities are subtracted from its assets to determine its net asset value. The net asset method exposes the fair market or equity value of the business based on adjusted assets minus the liabilities adjusted.
Income Approach
This is calculated by dividing the net operating income of the entity by the capitalization rate. This approach uses the income the entity or the assets generate to estimate their fair value.
Market Approach
The valuer will determine the value of an asset based on the selling price of similar assets in the market. The price and earning method is a combination of the income and market approach where the valuator calculates the company’s equity value by dividing its value by its tax after profits. The comparable analysis method also takes into consideration two companies with similar metrics.
As the top valuation consulting firm in India, RNC has a track record of negotiating successful M&A transactions. Our team of certified valuation professionals is actively involved in pre-deal and post-deal stages, providing invaluable assistance in price discovery and meeting regulatory compliance respectively. To leverage the expertise of India’s leading M&A valuers, call us at 9737033380.