Need to Value business stems from may reasons namely
- Seeking funds as Investment
- Lawsuits and Settling Litigation
- Inheritance of Property
- Certification for travel, education or specific purpose
Being a relative complex matter, often the common sense and basic key aspects help decide the variants for estimation
The 3 Widely accepted methods are as below
| Market Based | Asset Based | Income Based |
| Value of similar business in competition | Current Worth of the Assets belonging to the Co. | Future Potential of Income @ Business |
| May or may not be on Projections | No Forecast Required | Forecast is Must |
Market-based approach
With this method you:
- identify a similar firm (within same or similar industry, same business and markets)
2. identify the valuation multiple for the business.
3. Identify the appropriate variable and valuate.Some of the most popular multiples are:
- A) Price Earnings Multiple is calculated as Share price / Earnings per share (EPS)
EPS is net income/weighted average no of shares in issue
EPS may be adjusted to eliminate exceptional items (core EPS) and/or outstanding dilutive elements (fully diluted EPS)
Some of the key advantages are
- Most commonly used equity multiple
- Data availability is high
However, some of the cons are as
- PS can be due to varying accounting policies and manipulation
- Unless adjusted, one-off exceptional items does not give comparable valuation
- Does not work, if earnings are negative
- Price to Sales ( p/s) is less complex , more linear and often does not require change due to capital restructuring
- Price to Book ( P/B) takes into consideration the book value of the company and here income is often directly proportional to Assets
- EV/EBITDA: EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortisation is widely regarded by analysts as more reliable
It eliminates variation in capital structure, taxes , other income . Enterprise Value is the sum of Debt, Equity & cash balance & Ebidts is Earnings before Interest
Asset based approach
The Net Asset Value (NAV) is the easiest to understand. It is calculated simply as fair value of the assets of the business less the exterior liabilities owed. The key is deciding fair value, especially of assets since fair value may change significantly from acquisition value (for non-depreciating assets) and recorded value (for downgrading assets).
Also, the true value of your business may be significantly more than the simple addition of Possessions.. Things which you never taken care of may form part of the value, as would an unique way of doing business that gives your enterprise an benefit. An extension of NAV Method – the Replacement Cost Method – takes treatment of many of these issues. Set simply, it is the value any objective person would pay to arranged up a business that is precisely the same.
Income based approach
This method generally involves calculating the significance of the company using Cheaper Cashflow (DCF). In brief and very simply, this means calculating the present value of the future cash flows of the company. The discounting to provide value is done using the cost of capital of the company. Depending on goal, cash flows to the firm (that is, before debt obligations) or cash flows to shareholders may be used. It will create an Enterprise Value (value of financial debt + value of equity) and these Equity Worth.
With limited information, some of the key drivers are
- Data Availability
- Appropriateness of the method to the situation, industry, and the business
- Desired Level of Details as per Requirement
Valuation under multiple methods is average of final valuations to get more accurate figues
Principles of invariably, intuition, common sense, and acceptability will trump complexity, high math, and copious data for getting the TRUE NETWORTH.
The audit, as defined, is an official inspection of an organization’s accounts, typically by an independent body.
The audit is the examination or inspection of various books of accounts by an appointed body or an individual to verify the business records followed by physical verification to ensure the transactions are recorded as per Statutory Rules and Procedures. It also does an objective assessment, accuracy & transparency of financial statements provided by the organization.
External Auditors
An audit can be done by Internally with the help of the Internal team or Internal Audit as we call it.
While an Internal Audit can help streamline the regular business process and help run the checks on the large volume of data within the setup, but an external audit brings
- Integrity of the Financial Statements
- Objectivity
- Professional Competence and Due Care to the Process
- Confidentiality; &
- Install Professional Behavior
Audits not only reduce the risk of business failure but emboldens smaller businesses with a method to develop best business practices that enable them to grasp opportunities & thereby mitigating risk. To develop & nurture a successful SME market it is often seen that an audit can provide the essential outcomes and requisite skills necessary to do so.
Auditing standards require close examination of an entity and its environment, including the entity’s control environment and internal control. Auditors are required to assess how management identifies and mitigates risk as part of the audit risk assessment.
Business Goals & Internal Controls
Decision-making in the SME sector is also enabled and substantiated with Third Party Records & thus contribute to solid economic performance & growth overall.
Good corporate governance in small and medium-sized entities (SMEs) is equally important for sound decision-making within other stakeholders to build on applied Best Practices and Internal Confidence therein.
Simple examples of internal Controls & Business risk with Significant financial impacts may include a scenario where an SMB who has entered into the business of Imports & Exports and does not have appropriate procedures in place to recognize and mitigate foreign exchange risk.
At a broader level, an SME is not familiar with the way GST compliance and lapses therein with ref to its products or service, may be faced with unwanted notices an unexpected demand that may an adverse impact on their cash/ fund flow projections. Thus Business needs a validation from a third eye and hand-holding from Experts on Global Best Practices.
External & Internal stakeholders in SMEs
Audit costs were considered to be additional, unwanted to the business owners sometimes. However, there are various other stakeholders in the game.
The needs of other parties who may be interested in the financial position of an SME are often overlooked.For example, the tax debt obtains assurance from an audited set of financial statements provided with a tax filed return.
Banks and financial institutions are always influenced by the audited financial information when considering any kind of loans or funds for the business.
Hence the audit history with due records in terms of Past Audit Reports impact the ability of an entity to obtain the financial preference. Timely, Good & Relatively Cheap finance is important to enable an SME for a exponential business growth.
An independent audit indicates to all stakeholders that an independent expert has examined adopted business practices, thus validating the business controls and applied functions. If for instance there is no audit or it does not exist, implies that there is a lack of external oversight and thus vulnerable to a collapse.
Auditing standards and accounting standards
Large Listed Entities often have multifarious issues co
mpletely different from an SMB Setup. SME Audit is likely to focus on risks that arise due to relatively small size and evolving business structures. Audit at SME may not have complex accounting issues. In addition, Auditor’s role is more on statutory compliance, tax regulations and business restructuring along with tax planning & growth resurrection at small businesses’.