Knowing the worth! Valuation and its peripheral understanding

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Valuation is all about knowing the worth of the enterprise, shares, peculiar financial asset, other tangible / intangible assets etc. Promoters invest time, energy and resources to augment value by developing growth plans integrating it with goals. Promoters need to not only understand what their business is worth today, but they also need to know what supports and drives that value. Valuation usually serves as a reality check for promoters with a viewpoint on what their business is worth.

“Always know the difference between what we are getting and what we deserve”

The Institute of Chartered Accountants of India has issued the ICAI Valuation Standards 2018 to ensure the consistent, uniform and transparent valuation policies for the members undertaking the Valuation Assignments.

With a vision to promote best practices in this niche area of practice, the Standards lay down a framework for the chartered accountants to ensure uniformity in approach and quality of valuation output. They have been issued to set up concepts, principles and procedures which are generally accepted internationally having regard to legal framework and practices prevalent in India.

The ICAI Valuation Standards are applicable for all valuation engagements on mandatory basis for members undertaking valuation engagements under the Companies Act 2013. In respect of Valuation engagements under other Statutes like Income Tax, SEBI, FEMA etc, it will be on recommendatory basis for the members of the Institute. These Valuation Standards are effective for the valuation reports issued on or after 1st July, 2018.

Following are few methods of valuing the business:

  1. Market Approach
    • Market Price Method
    • Comparable Companies Multiple (CCM) Method
    • Comparable Transaction Multiple (CTM) Method
    • Discounts and Control Premium
    • Discount for Lack of Marketability (DLOM)
    • Control Premium / Discount for Lack of Control (DLOC)
  2. Income Approach
    • Discounted Cash Flow (DCF) Method
    • Cash Flows
    • Discount Rate
    • Terminal Value
      • Gordon (Constant) Growth Model
      • Variable Growth Model
      • Exit Multiple
      • Salvage / Liquidation value
      • Terminal Growth
    • Relief from Royalty (RFR) Method
    • Multi-Period Excess Earnings Method (MEEM)
    • With and Without Method (WWM)
    • Option Pricing Models
  3. Cost Approach
    • Replacement Cost Method
    • Reproduction Cost Method

Thus, at the end of the day, valuations is a widespread used scientific methodology to arrive at a logical conclusion of worth of something.

“There might be someone who cannot see our worth, let us not be that someone”