Valuation methods guide for startups and SMEs
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The document discusses various methods for valuing companies, including cost-based methods like book value and replacement cost, income-based methods like earnings capitalization and discounted cash flow, and market-based methods. It notes that valuation depends on factors like management, performance, projections, industry, and the transaction context. The valuation process involves considering financial and non-financial factors, using multiple models, and arriving at a valuation range. Special situations like multi-business companies, M&A, and cyclic businesses require tailored applications of valuation models.
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Valuation methods guide for startups and SMEs
- 1. Valuation Rs. Anjana Vivek www.venturebean.com [email_address]
- 4. AGENDA 52 Market based 43 Limitations of DCF 36 DCF 35 Earnings capitalisation 33 Income based 32 Liquidation 31 Replacement 28 Intangible assets 24 Goodwill 18 Book value 16 Cost based 13 Valuation methods 6 Background Slide no. Topic
- 5. AGENDA 102 Privatisation 97 Cross border transactions 94 Companies in distress 91 Cyclic companies 84 M & A 75 Multi business Special situations 67 Valuation process 63 What value depends on Slide no. Topic
- 55. Value estimated
- 57. Value estimated ? Since multiples differ, this cannot be used as a dependable guide for valuation
Hinweis der Redaktion
- This is so in the case of companies, just as in the following examples: land plus house can be less than land separately existing house – if 1 st floor is constructed the value immediately increases more than the cost of construction
- For total class of investors
- Many companies look very troubled in recession
- Land value high, one could consider market value of land or rental from land, whichever may be applicable
- Perceptions of Risks in the above lead to different valuations. Each element above can again be split into various factors. ie teams entrepreneurship quality and experience in running businesses in the past, professionalism of team, attention to detail Mgmt team must have clearcut idea – who handles what, one CEO, group dynamics. Also in VC if one team member is known, it is +ve, unlike in banking where this is percieved as favouritsm., bec confidence level goes up. Bet on team first - very people oriented ie directors, advisors and key team Financial risk depends on each of these factors Requirements of clauses of tie-in, statutory environment, shareholding patterns required to be fair for protection of entrepreneur interest, dilution of VC interest on later stages of funding and conversions etc. relevant for exit options will affect valuation ie at each stage valuation depends on return to the investor which is linked to the exit possibility. Eg. one entrepreneur wanted to list for IPO, but could not because of change in SEBI requirements. Immediately his valuation fell. Angels invested in his company at high premiums in 1 st round, anticipating sale at some point. However they later become reluctant to finance 2 nd round because no exit was in sight. Entrepreneur was stuck at this time without being able to give value to investors now as compared to few months before this change… and many such stories abound….
- Value depends on amounts of funds required. Many persons find in India today that if they require say 25 to 50 lacs, it is difficult to find financiers. In such a case the valuation will be low. If they require larger amounts as there are many VCs, it may be easier to get funding. Many entrepreneurs prefer to get small amounts from family etc. so that they can go to formal VCs at a later point in time and get better value, ie can give out smaller % of their company for larger amounts.
- Valuation varies in each of these
- Methods built up over a certain period of time As per frame work laid down and understood by students of finance and those dealing with this subject.
- Valuation not to be irrational ie return to investor must be perceived to lead to profit in future All dotcoms cannot be judged on same parameters and same business models. As we have seen dotcoms can come in different forms and have different ways of adding value. Valuation models to break down elements of models Let us see some of these elements in the next few slides
- Who, when, why – being valued Varies from time to time, today could be Rs. 1000 cr, tomorrow a fraction of this Of quoted example of Sabeer Bhatia who is reported to have said that he learnt negotiating skills accompanying mother at shopping in Bangalore ( ie form of best bargain, fair value)
- Ideally the sum of the whole should be greater than the sum of its parts