A valuation is not a single number waiting to be discovered. It is an opinion reached for a particular purpose, under a particular standard of value, on assumptions that are stated and can be examined.
This describes the subject in general terms and is not advice; what applies depends on the facts, and the law changes.
Understanding the service
Purpose drives method. A valuation for a transaction, for a regulatory filing, for a dispute and for internal planning may legitimately reach different figures, because the standard of value, the assumptions and the required basis differ.
The main approaches are the income approach, which discounts expected cash flows; the market approach, which draws on comparable companies or transactions; and the asset approach, which builds up from the net assets. The choice depends on the business, the information available and the purpose.
Where the law requires a valuation, it may also prescribe who may perform it. Certain valuations under the Companies Act, 2013 must be carried out by a registered valuer, and valuations for foreign exchange or income-tax purposes have their own requirements. The applicable requirement is confirmed before work begins.
ICAI has issued Valuation Standards which address the approach, the documentation and the contents of the report.
When it becomes relevant
- A sale, purchase or merger, or the admission of an investor
- An issue or transfer of shares requiring a valuation under the applicable law
- A dispute, separation of owners or a family settlement
- Financial reporting that requires fair value
- Planning, where the owners want a considered view of value
What the work usually covers
- Agreeing the purpose, the standard of value, the valuation date and the scope
- Understanding the business, its market and its financial history
- Analysing financial information and normalising it where appropriate
- Applying the approaches that fit the purpose and the facts
- A report setting out the approach, assumptions, sources and limitations
Framework and sources
The law and professional standards this work is carried out under. Links open the official site.
How the work runs
- Define the engagementSettle the purpose, the valuation date, the standard of value and any statutory requirement.
- Gather informationFinancial statements, projections, agreements, and discussions with management.
- AnalyseReview historical performance, normalise where appropriate, and assess the projections.
- Apply approachesUse the approaches appropriate to the purpose and reconcile the results.
- ReportIssue a report with the assumptions, sources and limitations stated.
A general sequence. Engagements differ, and the scope of each is agreed in writing.
Common questions
Why do two valuations of the same business differ?
Because purpose, standard of value, valuation date and assumptions differ. A valuation prepared for one purpose should not be relied on for another.
Can you confirm a price we have already agreed?
A valuation is an independent opinion. It cannot be prepared to support a predetermined figure.
Who is permitted to sign the valuation?
That depends on the law under which the valuation is required. Some valuations must be carried out by a registered valuer. The requirement is confirmed at the outset.