BUSINESS VALUATION

PRINCIPLES, STRATEGY & WAY FORWARD

THE START

 Three pathways of evaluating a business.

 Finance
 Strategy
 Future Plans
 Each is a separate exercise that must be run simultaneously.
 The outcome of all three will automatically will lead towards the comprehensive and right decision.
 After this exercise is run there will be only one option available for the team either a Yes or No

 After the three pathways have reached a conclusion we follow the

 Decision Tree Method
 Actual Due Diligence
 All these validate and audit the findings.
Finance Pathway

 Main methods of doing a Finance Business Valuation

 Net Present Value Method / Discounted Cash Flow method
 Capital Asset Pricing Model
 Either way the whole aim is to reach the company’s actual present value by discounting a certain risk
element of the future.
 NPV & DCF both use existing and forecasted cash flows to reach a conclusion.
 In principle from a purely financial aspect – positive numbers indicate a go ahead.
 These can be easily drawn up by the existing company’s past audited results and projected forecasts.

 Capital Asset Pricing basically puts a realistic value to a company’s tangible & intangible assets in real
term values.
 Comprehensively these will offer a proper insight into the financial health of the operation.
 This will also put into perspective any funds that need to be brought in from existing cash flows to
sustain operations.
Strategy Pathway

 A lot of people do not put a thought into this process which is very important. Example: A steel
manufacturing/trading company may have surplus funds and be doing extremely well but should it buy a
Rent A Car company even if the Finance Pathway gives a green light.

~~ STRATEGY FIT ~~

 The following questions need to be answered:

 Will the new business be a strategy fit or a complete diversification
 Do we have resources, manpower, expertise to not only run it today but grow it in future
 Is it a part of our main business or a small detour on the way i.e. whether we are & have the time &
willingness to commit to it.
 Will this business be a support model to our existing business i.e. Owning and operating trucks for a
logistics business is a support service and brings in revenue for a FMCG distributor it just makes life
easier and service is better – It does NOT generate additional revenue.
 Very important to debate the reasons for doing this business and what will this bring us in quantifiable,
measurable terms.
Future Plan Pathway

 Must make concrete stand alone business plan internally

 Finance plan internally – projected plan at least for next 10 years.
 This plan should be put through a sensitivity test to see its performance.
 Sensitivity analysis should hold up to at least -10% down turn if not worse
Outcome

 The comparison of the Future Plan made by us and the Forecasted Plan received by the other company
will show as to how do we perceive and understand the business.
 The actual financial numbers will prove whether this business is worth the value.
 The Strategy planning will allow to gauge the risk that we are willing to take after weighing the pros and
cons of the business
 It may happen that:
 Despite financial numbers being poor the new company may be a excellent strategy fit to us.
 Despite the new business as a standalone may not be a great plan but maybe a excellent support
service to us.
 The plans could be vice versa as well.
 Decision Tree Model debating the above makes you speak for and against every option possible and
then draws a pattern. Invariably the decisions will tilt towards one side.

 If the outcome is fair then a formal due diligence through a third party audit should be done to vet the
results.