Business analysis and valuation is a structured process to calculate a company’s financial value. This critical process serves multiple purposes, such as preparing for litigation, exit strategies, buying or selling decisions, acquisitions, mergers, or strategic planning. With various methods and intricate steps, business value determination requires precision and expertise. Only experienced professionals or firms like RNC can ensure an accurate valuation report.
Key Takeaways
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Business valuation follows a structured, step-by-step process
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Requires audited data, normalized accounts, and industry benchmarks
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Must apply risk-adjusted methods and sensitivity analysis
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Results in a defensible, certified valuation report
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Only registered valuers can issue legal reports in India
This article provides an in-depth understanding of the business valuation process, covering its objectives, methodologies, and key steps.
Objectives of Valuation
The objectives of valuation include:
- Understanding the business value for financial reporting.
- Assessing worth for mergers and acquisitions.
- Calculating equity for various methods of valuation of shares.
- Supporting strategic planning and exit strategies.
- Resolving disputes during litigation or buy-sell agreements.
The Business Valuation Process
Here’s a detailed breakdown of the business analysis and valuation process:
1. Establishing a Valuation Agreement
The process begins with identifying the ownership interest to be valued, the valuation date, and the purpose of valuation. The premise and standard of value (e.g., fair market value) are determined. The engagement type and the report format (summary or detailed) are also outlined.
2. Collecting Necessary Documents
Documents essential for an accurate valuation include:
- Historical financial statements.
- Balance sheets and income statements.
- Tax returns.
- Articles of incorporation and operating agreements.
- Contracts, leases, and shareholder agreements.
These provide a comprehensive financial and legal overview of the business.
3. Analyzing Economic and Industry Data
An expert examines the economic outlook (local, regional, national, or international) and the specific industry’s condition. This includes growth trends, competition, and regulatory factors that impact the business value.
4. Reviewing Financial Performance
A review of financial statements provides insights into the company’s historical performance. Comparing these metrics with industry averages helps identify strengths, weaknesses, and trends.
5. Normalization of Earnings
Adjustments are made to the financial data to reflect true earnings potential. This process ensures a fair representation of the business valuation report, free from anomalies like non-operational expenses or one-time income.
6. Valuation Analysis
The three broad approaches to company valuation do not include shortcuts; instead, they involve:
- Asset Approach: Evaluating the net worth of tangible and intangible assets.
- Market Approach: Comparing the business to similar companies in the market.
- Income Approach: Discounting future cash flows to their present value.
The method chosen depends on the business type, size, and purpose of valuation.
7. Applying Discounts and Premiums
Adjustments like lack of marketability discounts or control premiums are applied to refine the valuation. For instance, minority shareholders may face discounts for limited decision-making power.
8. Reconciling Indicated Values
Using multiple approaches often produces different value estimates. Reconciliation ensures a balanced outcome, considering all relevant data and equity valuation models.
9. Drafting the Business Valuation Report
A draft of the valuation is prepared, highlighting the methodology, findings, and rationale. The client reviews this report, and revisions are made as needed before finalization.
10. A Valuation Agreement is Drawn up
A business valuation expert identifies the ownership interest to be valued. Then the valuation date, the purpose of valuation, and the premise and standard of value based on which the value is to be used are determined. The kind of engagement and the type of report are also determined.
12. Necessary Documents are Furnished
There are different documents to be produced to conduct a proper business valuation. These documents include historical financial statements, balance sheets and income statements, tax returns, articles of incorporation, operating agreements of LLCs, private agreements among stakeholders and partnership agreements, contracts, buy and sell agreements, contracts, leases etc. All of these are required to make an objective, well-rounded business valuation.
13. Economic and Industrial Data are Analysed
A valuation expert evaluates the state and prospects of the concerned industry and the overall economic outlook (national, regional, local, and, if necessary, international).
14. Financial Performance of the Company is Reviewed
A thorough understanding of the financial condition, its nature, and its history are gained from historical financial statements, income statements, and balance sheets. Financial trends and performance are compared to the industry average.
15. Normalisation of Earnings
The normalisation of historical financial statements is done to get more realistic operating results and fair market value (FMV) of the assets and liabilities. It also gives more meaningful projections and forecasts and makes a better comparison with industry averages and peers.
16. Valuation Analysis
A valuation expert determines the worth of a privately-owned business or the percentage of ownership in a business. Either of the three methods- asset, market or income approach is used to conduct a valuation analysis. Why it was chosen is also explained in the report.
17. Discounts and Premiums are Applied
The valuation expert adjusts certain values according to the method of valuation chosen. Lack of marketability, control premium and discount for lack of control are some of the adjustments made.
18. Indicated Values are Reconciled
Various valuation approaches indicate values that are then reconciled to get an estimated value after considering all relevant facts and considerations of the valuation.
19. Report is Drafted
After all of the above steps, a draft report is prepared carefully. The client then looks for revisions. Once the client is satisfied with the report, the process is wound up.
Importance of Professional Expertise
Conducting an accurate business analysis and valuation requires specialized knowledge. Hiring experienced experts ensures precision, compliance, and clarity. At RNC, our seasoned professionals provide reliable business valuation reports tailored to meet diverse business needs.
Perhaps the most crucial step is hiring a business valuation expert who can conduct the whole process without errors. That’s why at RNC, we are trusted for our professional and experienced business valuation experts. We have been conducting business valuations over the years, making us a leader in the industry. Get in touch with us to know more about our business valuation services.
Also Read, How Revenue Is Important in Business Valuation
Conclusion
Understanding the business analysis and valuation process is essential for any business aiming for growth or change. From reviewing financial statements to applying valuation methodologies, each step contributes to an accurate assessment of the company’s worth. For professional guidance, consult experts like RNC, who specialize in creating accurate, reliable, and tailored business valuation reports.
FAQs
1. What is the first step in business valuation?
The process starts with defining the purpose and scope, followed by data collection from financial statements and legal documents.
2. Why is normalization important in valuation?
Normalization removes one-time or non-operating items to reflect the true operating performance of a business.
3. Which methods are used in the valuation process?
Valuers typically use DCF, NAV, and Market Multiples, often combining two methods to cross-verify results.
4. How are risks factored into the valuation?
Risks are built into the discount rate, growth assumptions, and sensitivity analysis to make valuations more realistic.
5. Who can conduct the business valuation process in India?
Only IBBI-registered or SEBI-recognized valuers are legally authorized to conduct certified business valuations.
About the author:
Sahil Narula
Sahil Narula is the Managing Partner at RNC Valuecon LLP and a Registered Valuer with IBBI. He brings over a decade of experience in Valuation Services, Corporate Finance, and Advisory, having led numerous complex assignments under the Insolvency & Bankruptcy Code, 2016, Mergers & Acquisitions, Insurance, and Financial Reporting.
He is a regular speaker at national forums (ASSOCHAM, CII, ICAI, IBBI, Legal Era) and currently serves as Co-Chairman of ASSOCHAM’s National Council on Insolvency & Valuations and a member of CII’s Task Force on Insolvency & Bankruptcy.
🤝Connect with Sahil on LinkedIn.