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Table of Contents
Introduction
Start-Up Valuation
Statutory Valuation
Valuation Process – Key Steps
Valuation Process – Approaches
Market Approach
1. Introduction
1.1 What is Valuation?
New Trends in Business Environment
1.2 New Trends
Business for Valuation v/s Profit
Increase in Serial Entrepreneur
Is it only Numbers?
Eternal Truth – Value is in the eye of buyer (Logistic Co)
1.3 Good Valuation = Story +Numbers
Appeal
Numbers provide a sense of control, a sense of precision and the appearance of objectivity.
Stories are more easily remembered than numbers and connect with human emotions.
Dangers
Without narratives to back them up, numbers can be easily manipulated, to hide bias or intimidate those not in the loop.
Stories that are not anchored to or connected with numbers can veer into fairy tales leading to unreal valuation.
1.4 Valuation at Each Stage
Development Stage
Ideation
Media Co, Mysa, BYJU’sBYJU’s unique teaching style the idea of creating a digital platform for students. It’s valuation was relatively low, now the company has a valuation of over $16 billion
Minimum Viable Product/Prototype
Agri, InstagramInstagram MVP focused on making it ease for users to taking and sharing photos quickly. It’s valuation was $1 billion when acquired by Facebook and now it’s in the range of $100 billion.
Traction
Health, DropboxDropbox service gained traction due to its simplicity and ease of use. Users can upload files from their device to the cloud, and access them from any device. Dropbox was valued at $9.2 billion and at the time of its IPO was around $8 billion.
2. Start-Up Valuation
2.1 Traits/Challenges Faced by Startups
Limited History and Fierce Competition
Financial Challenge to raise capital
Small or no revenues and negative operating
Illiquidity of Investments
Focus on Intangibles – Value of the business idea or technology under development or an innovation
Unique product/Strategic business model and feasibility study is important
Success ratio – Most don’t survive the test of commercial success and fall
2.2 Examples of Startups
2.2.1 Product
Success depends on consumer need and right vision:
E.g.- Zoom’s valuation increased from around $1 billion in 2017 to over $100 billion in 2021. Zoom’s video conferencing platform was easy to use and reliable, with features that made it popular for remote work and virtual events.
Price
Demands Constant Innovation, Evolving model, Pricing and Scalability:
E.g.- Airbnb‘s valuation increased from around $1.3 million in 2009 to over $100 billion in 2021. Airbnb’s pricing was often cheaper than hotels, especially in popular tourist destinations.
Place
Aggressive expansion plans and marketing strategies leads to a successful startup
E.g.- Uber‘s valuation increased from around $5.9 million in 2010 to over $70 billion in 2021. Uber’s app was available in multiple cities and countries around the world, making it easy for travellers to use the service wherever they went.
2.3 Popular Methods of Startup Valuation
Methods of Valuation would depend upon the stage of the Company
Asset Approach – ReplacementCost
Income Approach – Discounted Cash FlowMethod
Market Approach – Comparable Companies/transaction
Venture CapitalMethod
Chicago Method
3. Statutory Valuation
3.1 Purpose of Valuation
3.1.1 Regulatory Compliance
Companies Act, 2013
Internationally accepted Valuation Methodology
Valuation Standards adopted by any RV organisation
FEMA, 1999/Reserve Bank of India
Internationally Accepted Pricing Methodology
Income Tax Act, 1961
Discounted Free Cash Flow Method
Net Asset Value Method as per Rule 11UA
SEBI, 1992
SEBI Guidelines
IBC, 2016
Internationally accepted valuation methods
Companies Act, 2013
Income Tax Act, 1961
FEMA, 1999
Generally accepted valuation methodologies
Net asset value method or Discounted cash flow method
Internationally accepted valuation methodologies
Preferential issue of shares to Indian resident
Shares can not be issued below fair value
Shares can not be issued at more than fair value
NA
Preferential issue of shares to Non-resident
Shares can not be issued below fair value
NA
Shares can not be issued below fair value
Transfer of shares between resident (R) and non-resident (NR)
NA
Shares can not be transferred below fair value (NAV)
In case of R to NR: Shares can not be transferred below fair value
In case of NR to R: Shares can not be transferred at more than fair value
Financial Reporting
IFRS/IndAS
Purchase price allocation (PPA)
Fair valuation of tangible and intangible assets or Instruments
Asset impairment
Commercial Valuation & Fairness Opinion
Merger andacquisitions
Private equity placement
Joint Ventures
Corporatere structuring (swap ratio)
Internal Reporting Requirements
PE funds portfolio valuation
Internal management analysis
3.2 Bird’s Eye View
Frequent Requirements of Statutory Valuations
Sr. No
Relevant Section
Valuation Requirement/ Purpose
Under Companies Act, 2013
1
Section 62 read with Rule 8(6)
Valuation for Further Issue of Share Capital
2
Section 62 read with Rule 8(7)
Valuation of IPR/ know-how/Value addition for Issue of Sweat Equity Shares
3
Section 62 read with Rule 13(2)(g)
Valuation for Issue of shares on preferential basis
4
Section 230/ 232
Valuation under Scheme of Compromise/Arrangement or Scheme of Corporate Debt Restructuring (Mergers & Acquisitions)
5
Section 236
Valuation for Purchase of Minority Shareholding
Under Insolvency and Bankruptcy Code, 2016
6
Section 59(3)
Voluntary liquidation of corporate persons
Under Foreign Exchange Management Act, 1999
7
FEMA Regulations
For fresh Issue or transfer of equity instruments of Indian Company (Foreign Direct Investment)
8
Subscription/ Acquisition of equity shares of Overseas Companies (Overseas Direct Investment)
9
Swap of Shares
Under Income Tax Act, 1961
10
Rule 11UA
Determination of Fair market value of unlisted shares
3.3 Applicability at a Glance
Particulars
Registered Valuer
Merchant Banker (SEBI Registered)
Chartered Accountant
Cost Accountant
Issue of Shares
Companies Act 2013
✔
X
X
X
Income tax Act 1961
X
✔(DCF)
✔(NAV)
X
FEMA, 1999
X
✔
✔
✔
SEBI laws
✔
✔
X
X
Transfer of Shares
Companies Act 2013
X
X
X
X
Income tax Act 1961
X
✔
✔
X
FEMA, 1999
X
✔
✔
✔
SEBI laws
X
✔
✔
X
SEBI laws includes many rules and regulations which prescribes merchant banker to carry out valuation, however recently those are amended to recognize registered valuer (as per Companies Act,2013)
3.4 Registered Valuer Rules
4. Valuation Process – Key Steps
Steps of Valuation as prescribed by ICAI Valuation Standard
Define the valuation base, premise of the value and valuation date
Analyze the asset to be valued and collect the necessary information
Identify the adjustments to the financial and non-financial information for the valuation
Consider and apply appropriate valuation approaches and methods
Arrive at a value or a range of values
5. Valuation Process – Approaches
6. Market Approach
Calculation of Market/ Transaction Multiple
Valuation Multiple
Formula
Remarks
EV/Sales
Enterprise Value/Sales*
Provides Enterprise Value
Mainly used in case of technology companies or companies in early stage of development (incurring losses)
EV/EBITDA
Enterprise Value/EBITDA*
Provides Enterprise Value
Mostly commonly used for valuing companies across industries specially manufacturing companies
PE Ratio
Price/Earnings*
Provides Equity Value
Mostly commonly used for valuing companies across industries specially manufacturing companies
Need to evaluate impact of accounting policies
Price to Book
Market Cap/Net Worth*
Provide Equity Value
Mainly used in case of asset heavy business such as financial institutes
Industry Specific Multiples
EV/User: Social Media
EV/MW: Power Companies
EV/Room: Hotel Companies
* Base for Sales, EBITDA, Earnings, Net worth could be:
Most recent financial year(Current)
Last four quarters (Trailing)
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