The traditional practice of managing and presenting Annual Financial Reports as part of a Company Profile gives a quick overview of the past performance of a Company, but it does not fully assure what the real-time present holds and where a Company is heading to in the near future. This is because of the simple fact that Annual Reports are prepared and published based on the Company’s performance for/on that particular fiscal year and hence, the Balance Sheet merely reflects the status of the company based on events, P & L, and cash flow management etcetera at that state of time. In contrast, the Business or Company Valuation takes a wholistic approach in terms of context that includes (but not limited to) current & future strategic plans, anticipated future revenue streams and associated risks.
How well a Company is able to exploit its intangible assets (Patents, Trademarks, Trade Secrets, Licenses, Franchises and Industrial Designs etcetera) and Goodwill to deploy its tangible resources for maximum returns, while complying with Environmental, Social and Governance (ESG) Regulations will depend on its management strategies. In times of technological revolution, focus of attention is on innovation and adoption of emerging trends, to better utilize the tangible and fixed assets for maximum ROA and Asset Turnover Ratio, which in turn determines the value of a Company. Thus, it is imperative for the Management to conduct Business Valuation at quarterly or frequent intervals, for the evaluation on the effectiveness of its management strategies. Business Valuation Reports can be a good barometer to reveal the direction of a Company’s future.
Business Valuation should not be confused with Quarterly Accounts or Financial Reports and Book Values. Valuation is neither the task nor functional responsibility of the Accounts Team. In simple terms, Business Value/Valuation can be defined as the Net Worth or Potential Value of a Company, at a given point in time, for a specific purpose, in context of its current and future business plans, with reliable data and reasonable assumptions. Valuation is conducted by an independent and neutral professional valuer, one with domain expertise and knowledge of appropriate valuation methods for different classes of assets in a Company; for instance:
- Investment Projects and Joint Ventures
- R & D Projects
- Intangible Assets
- Land, Plant, Equipment, Movable Assets (Vehicles, Ships, Aircrafts, Mobile Machinery, Rigs, Platforms, Ports and Offshore Supply Bases, +++)
- Financial Investments and Related Products
Purpose &/or Benefits of Valuation
There are increasing numbers of premises or purposes for conducting valuation in today’s fast-paced economic world. It is becoming an international norm to first have a valuation report ready at-hand as an important business document before discussing any collaboration, joint ventures, or Foreign Direct Investments. Other most common reasons for conducting regular valuations are:
- For Securities and Financial Institutions during borrowing and lending decision-making exercises.
- Tax Incentives and Reporting Requirements
- Shareholders Agreements for Shares Sales Purchase Transactions
- Litigation Matters
- Performance Reporting to the Shareholders
- Investing in Patents, Industrial Designs, Licensing and Franchising Ventures
- IPO Prospectus
The selection of a professional valuer is as crucial as the objective of a valuation itself. Valuers are expected to have good knowledge of economic factors, business environment, future trend of technologies, risk management perspectives, and must be unbiased with a commitment to high ethical standards.
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