Business Valuation

Value of a particular business or asset may be different for different parties depending upon strategic intent, synergies or for other reasons. Value must be clearly distinguished from price and businesses may justifiably undertake to consummate a transaction at a price which does not fall within an assessed fair value range.

Valuation Methods 

Asset Approach

• Book Value, Adjusted Book Value, and Liquidation Value are the examples of asset based valuation approach.
• Assets acquired (from book) less liabilities assumed divided by number of shares.The implication of this method is that any asset that are outside balance sheet is not considered. Similarly, there may be stuff on liability side that acquirer may not be interested in owning e.g. loans, operating lease (future rentals as per lease), superannuation liability, contingent liability etc. The balance sheet book value approach does not reveal all these facts.
• The fair (market) value approach can help in catching up the above limitation. Typically, the fair value approach is used for Acquisition whereas Book value approach used for Merger.
• Fair value of operating lease will have no effect as NPV will added to both asset and liability side. For fair value computation NPV of superannuation appear on liability side. The amount of contingent liability will kept in the ESCRO account. If case is resolve in favorably in the stipulated period, then that money goes to the seller.. however, if case is not settle in stipulated period, then money goes to the buyer...
• Any company who's value are driven by things that are driven by human resource, supplier relation, customer loyalty and other intangible. then Asset based valuation approach will not work.
• If buyer are acquiring ~20% (minority) stake.. asset based approach is not recommended.. As buyer cannot sell the unproductive assets to unlock the value.. as buyer does not have controlling stake to exercise such decision...

Income Approach

Compute maintainable profit for next one year = EBIT * (1-t)
Use multiplier e.g. earning (P/E) or cost of capital K
1 / K as is better multiplier than P /E

Enterprise Value = EBIT (1-t) * / K

The above method does not take into account future beyond 1 year. That means, it does not consider the growth potential or loss that company can incur in future. Another limitation of this method is that these are short term accounting numbers and so can easily be managed/manipulated.

Discounted Cash Flow

This is most popular method of valuation.
Find out variables that affect the free cash flow e.g. revenue, opex, net capex and change in net working capital.

Free Cash Flow (FCF) = Cash flow from operating (CFO) - Capital Expenditure (Capex)
Free Cash Flow (FCF) = EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure

Enterprise Value = Present Value of Free-Cash Flow until n-th year + Present Value of Terminal Value of Free-Cash Flow at n-th year

Enterprise Value = PV (FCF) + PV (TV)
where, Terminal value or continuing value at n year, TVn = FCFn (1+g)/ (K-g)
Equity Value = Enterprise Value - Net Debt

Value per share = Equity Value / Number of Shares


• Capex can be projected by ... 
• 1. when no data available... link as % of revenue 
• 2. access data.. by asking right questions... Give me the minutes of the board meeting... It board minutes does / doesn't talk about the expansion plan will be most authentic source of business plan.. lead to projection of capex... 
•  Revenue = price * volume... Buyers and seller should be convinced about the volume & its growth... This is crux of everything...