What is Business Valuation?
Business valuation is the process of estimating the value of a company, its shares or its assets using accepted methods such as discounted cash flow, comparable companies and net asset value. A valuation report documents the approach and assumptions. It is needed for fund raising, share issue or transfer, mergers and compliance.
Who needs it
- Startups issuing shares to investors.
- Companies granting ESOPs or buying back shares.
- Owners planning a merger, sale or restructuring.
- Companies requiring valuation for FEMA or tax compliance.
- Families planning succession or settlement.
Benefits
- Defensible value supported by method and data.
- Reports acceptable for the specific purpose, such as FEMA or tax.
- Clarity in negotiations with investors and buyers.
- Documented assumptions that auditors can review.
- Better planning of equity dilution.
Valuation methods explained
No single method suits every business. A valuer usually applies more than one and explains why the final figure sits where it does. The common approaches are below.
| Method | How it works | Usually suits |
|---|---|---|
| Discounted cash flow (DCF) | Projects future cash flows and discounts them to today's value at a rate reflecting risk | Businesses with reliable projections, such as growing companies with some operating history |
| Market approach (comparables) | Compares the business with similar listed companies or recent transactions | Businesses with comparable peers or deals to refer to |
| Net asset value (NAV) | Adds up the fair value of assets and subtracts liabilities | Asset-heavy or holding companies, and businesses being wound up |
| Cost of recent funding | Uses the price at which investors recently bought shares | Early-stage startups with little financial history |
Valuation for different purposes
The purpose decides who must sign the report, which method is acceptable and how long the report stays valid.
- Fund raising: investors and founders need a defensible starting point for negotiation.
- ESOPs: the fair value of shares is needed at grant, and often at exercise and for accounting.
- FEMA: issue or transfer of shares between residents and non-residents must follow pricing guidelines supported by a valuation certificate.
- Mergers, demergers and buy-outs: the exchange ratio or price needs an independent report.
- Tax and accounting: some transactions need a fair value for tax computation or financial reporting.
What drives the value of a business
Valuation is driven less by last year's profit than by how durable that profit looks, which is why the questions below matter more than the headline number.
- Revenue growth and the quality of that revenue, such as recurring contracts versus one-off sales
- Margins and how they compare with peers
- Dependence on a few customers, suppliers or key people
- Capital needs and debt
- Market size, competition and the strength of the business model
- Quality of the books: clean, audited accounts support a higher level of confidence
How to prepare for a valuation
The faster you provide complete data, the faster the report is ready. Prepare three years of financial statements, a realistic projection with the assumptions behind it, a capitalisation table, key contracts and a short description of the business model and competitors. Projections should be ones you would be comfortable defending to an investor: a valuer will test them against history and the market.
An illustration
A software services company has revenue of ₹10 crore, steady margins and long-term clients. A valuer might apply a discounted cash flow model using the company's projected profits, test the result against the multiples at which comparable listed companies trade, and then reconcile the two with a weighting based on how reliable each is. The report states the range of value, the assumptions and the reasons for the weighting, so that investors and auditors can see how the number was reached.
What a good valuation report includes
A report has to stand up to someone who was not in the room, so it states its purpose, its basis and its limitations as well as its conclusion.
- Purpose, valuation date and the standard of value used
- Description of the business, industry and key risks
- Sources of information and any limitations
- Methods used, with workings and assumptions
- Conclusion with a clear range and the basis for any adjustments
- Declarations of independence and the valuer's credentials
Common questions about valuation reports
Three questions come up most often, about influencing the value, about reusing a report, and about how often to value a company.
- Can I choose the value? No. The valuer forms an independent view, though you can discuss assumptions.
- Can the same report be used for several purposes? Not always. A report prepared for one purpose may not be accepted for another.
- How often should I value my company? When you issue or transfer shares, grant ESOPs, merge, or when a law requires it.
Official sources: the Companies (Registered Valuers and Valuation) Rules, the FEMA non-debt instrument rules and the Income-tax Rules.
Documents required
- 01Financial statements for recent years
- 02Projections and business plan
- 03Cap table and shareholder agreements
- 04Details of assets, liabilities and contingent items
- 05Terms of the proposed transaction
- 06Industry and customer details
Due dates and penalties
| Item | Due date | If missed |
|---|---|---|
| Valuation for share issue or ESOP | Before the transaction, usually within validity period of the report | Report may be unacceptable if stale |
Some valuations must be done by a registered valuer or a merchant banker under specific laws. We confirm who can sign for your purpose.
Mistakes to avoid
- Using an outdated report for a new transaction.
- Over-optimistic projections without support.
- Choosing a method that does not suit the purpose.
- Ignoring contingent liabilities.
- Getting a valuation from someone not eligible under the relevant law.
Why PHMG
- Partner-led: a chartered accountant reviews your work, not only a junior team.
- Clear fee and scope in writing before we start.
- Deadlines tracked for you, with reminders well before the due date.
- Your documents and data are handled confidentially.
- Online service across India, with a single point of contact.
Fees depend on your case. Request a quote for a clear scope and fee.