Updated: Feb 5, 2019
Technology, Competition and Regulations are key drivers of change and disruptions in the business world today. Technology like AI, Analytics, Blockchain, Fintech, Mobility has been at the core of emergence of start-ups and Unicorns that resulted in sunset of several erstwhile behemoth businesses that could not adapt with changing times.
Competition is driving many businesses to M&A, consolidation, re-structuring, bankruptcy, financial stress etc. Regulations in the areas of corporate governance, finance, taxation, bankruptcy, insolvency etc are leading to changes from the Board level down to the way businesses conduct their operations.
These changes and disruptions have seen emergence of new and, at the same time, sunset of several traditional profession and skills. Emergence of Valuation as a profession needs to be seen in this context.
What is Valuation?
Warren Buffet famous statement “Price is what you pay, Value is what you get” rightly brings out subjectivity in value as it may mean different things to different people depending on situation.
This makes Valuation more of an art than a science of determining ‘economic worth’ of business under certain assumptions, limiting conditions and subject to availability of data.
Future projections, assumptions, constraints, myriad of methods, personal biases and intelligent judgement are all involved in trying to get to a reasonable estimate of value for a business.
But why value businesses?
Several strategic, regulatory and reporting situations require businesses to value one or more of their business or specific assets.
Start-ups have been promoted by techies with entrepreneurial spirit but shallow pockets. They are in need of funds to fuel future growth. Several investors, on the other hand, view investment in these start-ups as great bet due to future growth potential.
Existing businesses have to face challenge from competitive forces and sustaining growth. They find great opportunity of synergy and growth through re-structuring of businesses, spin-off, M&A, stake sell, sale of business, etc.
Business also face challenge due to high leverage resulting in mounting debts and interest burden. Creditors of long-term funds would like resolution of this situation so as to keep their NPA in check.
All these situations require business valuation done to know what the business is worth. This provides both seller and buyer with a fair value to make strategic decision..
Several regulations in India require valuation of business or specific asset including Companies Act, 2013, Insolvency and Bankruptcy Code 2016, Income Tax Act, FEMA, SEBI, Indian Stamps Act, Transfer of Property Act etc.
There are several Indian Accounting Standards (IndAS) that require or permit fair value of measurement as prescribed in IndAS 113. Under IndAS, valuation of financial instruments, ESOPs, Intangibles, and investments etc. is required at Fair Value.
(Author is a practicing Cost Accountant and Registered Valuer)