Business Valuation:Methods:

Some Points:

• Value depends on purpose of valuation.Values for Buyer and seller are different.
• Value is related to future expectations.So valuation is determined not by profits it has achieved in the past but by the profits it expect to generate in the future.
• Value of business asset, in most cases can not be higher than the capitalised value of income it generate.
• Value of asset is determined by the degree of control the owner can exercise on the asset.
• Value of asset is specific to a point in time and can change with the laspe of time.

• Business with no product or revenue and little history, imcomplete plan/team and initial period of rpoduct development.
• No product revenue but some expense history
• Product and revenue in place but incurring loss
• product and revenue in place and operating with profit

Methods of valuations

• Net Tangible method
• Stock Exchange method
• Profit Earning Capacity method
• Fair Value method
• Face Value Plus Interest method
• Dot Com Method

   

   

   

   

   

   

   

   

   

   

  Valuation Methods

  Net Tangible method
  

  The net tangible asssts method is computed with the help of latest audited balance sheet. First the figure of total assets is worked out. Then all liabilities other than capital & reserves deducted from the total assets. Lastly assets are revalued and any increase or decrease on account of this has to be effected. Utimate value arrived at gives the value of net tangible assets.This value then divided by number of shares to arrive at net asset value per share.

  Stock Exchange method
  

  This method can be used only when company is listed on stock exchange.This method is very easy and simple. Merket value acts as the guiding factor for valuing shares.Any manipulation in share prices can be averaged out by taking valuation period from three months to three years.This can also be achieved through average of higher and lower value and average of the same.

  Profit Earning Capacity method
  

  This method suggests the valuation of the company by capitalising the average of profits after tax.This can be done with certain % of capitalisation suggested by guidelines. 15 % in case of manufacturing companies / 20 % in case of trading companies and 17.50% for intermediate companies. Normally a period of three years is taken to average out profits.Most important point under this method is rate of capitalisation.

  Fair Value method
  

  This can be done on the basis of average of the net tangible assets value and the profit earning capacity value.If the profit earning capacity is nil , then fair market value should be limited to half of the net assets and if the net assets constitutes mostly liquid assets ,the fair value may be fixed upto 66% of the net tangible assets.

  Face Value Plus Interest method
  

  This moethod of valuation is done by taking into consideration its total investments at the time of acquisition and by adding to the same an equivalent of 15% arte of interest every year on compounded basis.From the total sum so computed ,total amount of dividend paid to shareholders from the date of acquisition stretching to the date of valuation has to be deducted.

  Dot Com method
  Here comes value of intangibles and future earnings.Number of clicks and page views.

  1. Growth in Gross Sales:

     This concept is based on topline growth. Unprofitable companies unable to show sales growth is unlikely to ever improve its bottomline.Low sales growth and low potential.

  2. Gross Profit compared to Sales & Merketing Expenditures:

     Company does not have to spend itself into oblivion to drive people to spend money there. Marketing expenses are the investment that the company is spending to build its brand.But lower the ratio better it is.

  3. Cost Vs. Benefit for each new customers acquired:

     This can be achieved through total sales and marketing expenses divided by number of customers. Again divide sales by number of customers to arrive at sales per customers.

  Some benchmark of .com valuations:
  Microsoft Hotmail = No. of subscribers 9 Mn and price per subscribers = $ 400
  AOL = No. of subscribers 6 Mn and price per subscribers = $ 48
  Netscape = No. of subscribers 24 Mn and price per subscribers = $ 176
  India World = No. of subscribers 13 Mn and price per subscribers = $ 38
  Excite = No. of subscribers 50 Mn and price per subscribers = $ 134
  Time Warner = No. of subscribers 20 Mn and price per subscribers = $ 7250

  These are just a few methods for .com valuation and there can be many such models be developed as the market matures.