Business Valuation Report-Draft-1

Business Valuation Report-Draft

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Date- XX

To

Board of Directors,

XXX

 

Dear Sir,

Concerning your letter requesting us to carry out the work in connection with the valuation of the equity shares of XX (“the Company”) to derive the value of the equity shares for the purpose as mentioned in “Point no. A” below, we are pleased to submit to you our report.

The procedures described in this report, do not constitute an audit nor a review of financial statements. Consequently, we do not express an opinion on the financial and accounting data of the company, nor on any other information mentioned in this report.

• Overview of Company
  

  XX (“XX”/”Company”) is a private company limited by shares, incorporated on
  

  Details of management of the Company:
  

 

The Purpose of valuation is that Company is planning for disinvestment i.e. Company is looking to sell all or a portion of its ownership in a business. It is in this connection that we have been requested by the Client to carry out fair market value of Company’s shares, on a going concern basis, as at March 31, 2023
being the valuation date, which would determine the fair market value of shares.

 

• Shareholding Pattern
  

Details of equity shareholders of the company as on the 31st March 2023 holding more than 5% shareholding is set out below:

 

• Purpose of Valuation
  

  The Company proposes to issue right shares to domestic shareholders. XX has approached XX (“Registered Valuer”) to provide a fair valuation of Equity shares of XX as on the valuation date, to be carried out in accordance with xx
  

  The information contained herein and our reports are highly confidential. We are not responsible to any person or party for any decision taken by such person or party based on the report. Any person intending to invest/finance the Company shall do so after taking own professional advice and carrying out their own due diligence procedure to ensure that they are making a sound decision. It is hereby notified any reproduction of our report for any purpose other than intending purpose can be done only after our prior permission.
  

• Industry Outlook
  

  Over last 15 years the financial consulting services sector got an opportunity to partner and play a decisive role in shaping up India’s growth story. Companies needed specialized support from the financial consultants to strategize and successfully execute their plans. The needs included professional help on areas such as strategy planning, M&A, tax structuring, capital raising, setting up financial systems to name a few.
  

  The financial consulting industry has responded quite well to the opportunities and challenges offered. The financial consultant has indeed covered an impressive distance from being a mere book keeper and basic tax advisor to becoming an expert solution provider across a wider gamut of services required by the industry. Rapid automation coupled with advent of ERP solutions helped transform the role of a financial consultant quite dramatically. No longer were the accounting and book keeping skills a real requirement or differentiator for a consultant. The industry needed their involvement in strategy development and its seamless execution. Accesses to capital also resulted in an increased requirement and ask on the business owners from their investors to focus on analytics and risk assessment based decision making and developing abilities to develop and monitor performance monitoring metrics.
  

• Valuation Methodology
  

  There are various methods adopted for valuation of the Company. Certain methods are based on asset value of an entity while certain other methods are based on the earnings potential of the company. Each method proceeds on different fundamental assumptions which have greater or lesser relevance and at times even no relevance, to a given situation. Thus, the methods to be adopted for a particular valuation exercise must be judiciously chosen.
  

   

1. NET ASSETS VALUE (‘NAV’) METHOD
   

The Net Assets Method represents the value with reference to historical cost of assets owned by the company and the attached liabilities on the valuation date. Such value generally represents the support value in case of profit-making business and thus, has limited relevance in the valuation of the business of a going concern.

In the present case, the business of Company is intended to be continued on a ‘going concern basis’ and there is no intention to dispose-off the assets, therefore, the Net Assets Method is not adopted for the present valuation exercise.

 

1. COMPARABLE COMPANIES MULTIPLE METHOD
   

The Comparable Companies Multiple Method arrives at the value of the company by using multiples derived from valuations of comparable companies, as manifest through stock market valuations of listed companies. This valuation is based on the principle that market valuations, taking place between informed buyers and informed sellers, incorporate all factors relevant to valuation. Relevant multiples need to be chosen carefully and adjusted for differences, such as growth potential, past track record, size, company dynamics, etc.

The Comparable Companies Multiple Method approach of valuation was not considered owing to the absence of strictly comparable transactions and paucity of publicly available data in the relevant industry.

 

1. DISCOUNTED CASH FLOW (DCF) METHOD
   

The Discounted Cash Flow (DCF) Method values the Company by discounting its free cash flows for the explicit forecast period and the perpetuity value thereafter. The free cash flows represent the cash available for distribution to both the owners and the creditors of the company. The free cash flows are discounted by Cost of Equity (COE). The COE represents the returns expected by the investors of equity, for their relative funding in the entity. The present value of the free cash flows during the explicit period and the perpetuity value indicate the value of the company.

 

1. MARKET PRICE (‘MP’) APPROACH
   

The market price of a share as quoted on a stock exchange is normally considered as the fair value of the shares of that company where such quotations are arising from the shares being regularly and freely traded in, subject to the element of speculative support that may be inbuilt in the value of the shares.

In the present case, the Market Price Method is not applicable, as the Shares of the Company are not listed on any recognized stock exchanges as on date.

 

For the purpose of present valuation exercise, we have considered fit to use Discounted Cash Flow (DCF) Method for determining the fair value of shares of the company as the DCF Method is internationally accepted pricing methodology for valuation on an arm length basis.

• Financial Highlights
  

  (Rs. In Lakhs)
  

   

   

   

• Source of Information
  

  We have relied on the following source of information for the purpose of this valuation:
  

  • Provisional Financial Statements for the years ended March 31, 2023 of the Company.
    
  • Projected Profit and Loss Account and Balance Sheets for 5 years.
    
  • Discussions with the Management of the Company regarding the business operations and current market conditions and developments.
    
• Procedures carried out
  
  • Planning and preparation of the engagement;
    
  • Establishment of a list of documents to be obtained;
    
  • Collection of documents and information;
    
  • Analysis of documents and information provided;
    
  • Review of provisional balance sheet and statement of Profit and Loss.
    
  • Review of projected balance sheet, statement of Profit and Loss and cash flows.
    
  • Review of basic assumptions made for projections
    
  • Talks and exchange of correspondences with management and persons in charge of the company’s accounts;
    
  • Determination of the valuation parameters (up-dating rate growth rate to infinity.)
    
  • Assessment and evaluation of the cash-flow available discounted by the company based on the Discounted Cash-flow methods;
    
  • Implementation of valuation methods (Discounted Cash Flows) and analysis of results;
    
  • Calculation of the company’s range of values using said valuation methods.
    
  • Drafting of the valuation report.
    
• Key assumptions & Factors affecting Valuation
  

  The value of shares of the Company under DCF Approach has been arrived at as follows:
  

  Valuation under DCF method is based on the projections for the period from 1st April 2023 to March 31, 2028 (“explicit period”) as provided to us by the Management of the Company.
  

  For the explicit period, free cash flows from the business have been arrived at as follows:
  

  • Profits before taxes as per the projections adjusted with applicable taxes have been considered to arrive at the free cash flows.
    
  • Taxes payable are reduced.
    
  • Other Non-operating income have been reduced from profit after tax.
    
  • Depreciation and Amortization being a non cash expenditure have been added.
    
  • Fund requirements for proposed capital expenditure have been reduced from the cash earnings of the respective years.
    
  • Fund    requirements    for    incremental/decremental    working capital    have    been reduced/added from/to the cash earnings of the respective years.
    
  • Movement in borrowings have been duly considered.
    
  • The Free Cash Flows to Equity of each year are then discounted at the Cost of Equity. Cost of Equity is considered as the most appropriate discount rate in the DCF Method, since it reflects both the business and the financial risk of the Equity shareholders.
    
    • Cost of Equity is worked out using the following formula:
      
      • Risk Free Return + (Beta x Equity Risk Premium) + Specific Risk Premium
        
      • The risk-free rate of return is taken at XX% based on bond rate historical data as on March 31st 2023. (Source: XX)
        
      • Unlevered Beta is considered as 0.30, in the absence of any directly comparable peer company, unlevered beta of Financial Services Industry has been considered. (Source:XX)
        
      • Equity risk premium (“ERP”) of Indian market is considered at XX% (Source:XX)
        
      • Cost of equity is XX%.
        
      • Since, Cost of Equity (COE) is arrived at using CAPM, which is based on statistics of the overall market and fails to capture company specific risks and the investment risks associated with small sized companies i.e., company specific risk premium is considered at approx. XX% which is XX% of COE
        
      • Adjusted COE comes to XX%.
        
  • After the explicit period, the business will continue to generate cash. In DCF Method, therefore, perpetuity value is also considered to arrive at the Equity Value. For arriving at the perpetuity value, we have considered a growth rate of 5.00% based on discussion with the management of the Company.
    
  • The discounted perpetuity value is added to the discounted cash flows for the explicit period to arrive at the Equity Value.
    
  • The Equity value so arrived is divided by the number of outstanding Shares on fully dilutive basis as on the date of this report to arrive at the value per Share.
    
  • The Issued, Subscribed and Paid-up Equity Share Capital of the Company is ₹1,00,000 (10,000 shares comprising of shares of INR 10/- each.)
    

 

 

 

• Exclusions and Limitations
  
  • The scope of our assignment did not involve us performing audit tests nor review for the purpose of expressing an opinion on the fairness or accuracy of any financial or analytical information for the future period that was used during the course of our work.
    
  • We do not take any responsibility for any changes in the information used for any reason, which may occur subsequent to the date of our report.
    
  • This report and the information contained herein are absolutely confidential and are intended for the sole use of the Board of Directors and Shareholder of the Company for the purpose as set out above. It should not be copied, disclosed, circulated, quoted or referred to, either in whole or in part, in correspondence or in discussion with any other person except to whom it is issued. We will not accept any responsibility to any other party to whom this report may be shown or who may acquire a copy of the report, without our written consent.
    
  • Whilst all reasonable care has been taken to ensure that the facts stated in the report are accurate and the opinions given are fair and reasonable, neither ourselves, nor any of our Partners, Officers or Employees shall in any way be responsible for the contents stated herein. Accordingly, we make no representation or warranty, express or implied, in respect of the completeness, authenticity or accuracy of such statements. We expressly disclaim any and all liabilities, which may arise based upon the information used in this report. We are not liable to any third party in relation to the issue of this report.
    
• Valuation Approach
  

  There are several commonly used and accepted methods for determining the fair market value of shares for Company Shares valuation. This valuation has been done as per the Discounted Cash Flow (DCF) Method. In the present case, accordingly we have applied the DCF method of valuation.
  

• Discounted Cash Flow (DCF) Method
  

  Under the DCF method, the value of the undertaking is based on expected cash flows for future, discounted at a rate, which reflects the expected returns and the risks associated with the cash flows as against its accounting profits. The value of the undertaking is determined as the present value of its future free cash flows.
  

  The free cash flows are based on the future profitability and cash flow projections of the business that are determined on the basis of estimated revenues and cost structure of the Company as provided by the Management.
  

  For calculation of fair value of shares as per DCF method, the cash flow projection for 5 years (i.e. from Financial Year 2023-24 to 2027-28) has been taken into consideration. To calculate enterprise value, Weighted Average Cost of Capital (WACC) has been taken as XX% and long-term Growth rate beyond projection period as 4.00%.
  

  Based on this, total enterprise value of the Company determined as an aggregate of the present value of explicit period & terminal period cash flows, is derived at
  Rs. XX Lakhs and the value per equity share of the Company is arrived at
  Rs XX /- per share (for XX equity shares of Rs 100 each). (Refer Annexure for working).
  

   

• Sensitivity Analysis
  

  We have also carried out the sensitivity analysis of the above factors i.e., WACC and long-term growth rate and arrived at the Enterprise value in the range of
  Rs. XX Lakhs to Rs. XX Lakhs. The range is clarified through the following sensitivity analysis:
  

  (Amount in Lakhs.)
  

  Growth	WACC
  Rate	13.99%	14.99%	15.99%
  3.00%
  4.00%
  5.00%

   

• Summary
  

  On the basis of underlying key assumptions and limitations, Projected Investment in Business, management projections, business dynamics and growth potential of the business and aforementioned calculation, in our opinion, the total Enterprise value of the Company and fair value of equity shares of the Company can be summarised as under:
  

 

These valuation ranges are indicative only and for the sole purpose set out in this report intended for the information of XX PRIVATE LIMITED only.

 

For XX

Registered Valuer under IBBI

 

 

Place : XX                

Dated : XX                     Regn. No. XX

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