Your business is probably your biggest asset and hence it’s important to understand an estimate of its value. However, the biggest problem is that company valuation is a very complex and involves several different factors. Business Valuation is a combination of science and expertise.

“Quote too low a figure, and you will undersell your company; aim too high, and you will never sell.”

For one thing, there is no one way to establish what a business is worth. That’s because business value means different things to different people. To the owner, the process of valuation is personal and emotional, and they many times have an unrealistic idea of how much their company is worth. To the buyer, the valuation process is far more objective. Both will look at “fair value” differently. Finding balance can prove to be extremely difficult.

A business valuation takes strategic and in-depth analysis to determine an accurate estimation of a company’s worth. There are numerous factors included in the process of establishing a selling price. It takes more than just a range of numbers to value a company.

Valuing a business on periodic intervals is a good practice, even if you are not planning to sell. Valuation helps you understand your business weaknesses and strengths and continue to improve its real or perceived value. It also helps to motivate the management team, if the team is compensated based on increase in business value. Regular valuation is a good discipline and can help you take the necessary steps and make the necessary adjustments to generate the maximum value in an eventual sale.

There are different ways one can estimate the value of any business. Each method is based on different financial information and presumptions, which might result in a different value.

Whichever method is used to value the company, one should always prepare a statement of income and profit/loss since most buyers request this document to estimate the cost of goods sold and operating expenses.The three most common methods used for Business Valuation are explained below:

DISCOUNTED CASH FLOW APPROACH (SUB-SET OF INCOME BASED APPROACH) 

From the buyer’s perspective, this is the most accurate way to value a company because it forces the business owner to give more attention to details like trends in sales and profits and the capitalized value of the company. This method of valuation reflects the amount of money the investor estimates to come into the business in the next few years.

The Discounted Cash Flow method is a subset of the income-based approach, and is often used in M&A transactions. This method, which is based on estimating the current value of future cash flow, is appropriate for businesses which have forecasted steady cash flow over several years.

Discounted Cash Flow method determines the business value by considering these inputs:

• A stream of expected economic benefits, such as the net cash flows.
• A discount rate which establishes the required rate of return on investment.
• An expected gain from the disposition of the business at the conclusion of the ownership period, or the long-term (terminal) value.

 

 

 

 

There are three critical questions one needs to answer to capitalize future earning:

• Value: How much is the business worth today, based on what it will earn in the future?
• The Rate of Return: What is the investor’s expected rate of return?
• Equity Share: How much equity will the investor get for their investment?

Pros:

• Theoretically the most sound method if one is very confident in the projections and assumptions, because DCF values the individual cash streams (the actual source of the company’s value) directly.
• DCF method is not heavily influenced by temporary market conditions or non-economic factors.

Cons:

• Valuation obtained is very sensitive to modelling assumptions—particularly growth rate, profit margin, and discount rate assumptions—and thus, different DCF analyses can lead to wildly different valuations.
• DCF requires the forecasting of future performance, which is very subjective, and most of the value of the company is usually derived from the “terminal value,” which is the set of cash flows that occurs after the detailed projection period (and is therefore usually projected in a very simple way).

This approach is best suited for solid cash-generating businesses (i.e. businesses that are not asset intensive)

ASSET-BASED APPROACH

An asset-based approach is a type of business valuation that focuses on a company’s net asset value (NAV), or the fair-market value of its total assets minus its total liabilities, to determine what it would cost to recreate the business.

The real value of assets in an asset-based approach for valuing a business may be much greater than simply adding up the recorded assets. But, depending on the nature of the business, the asset-based approach may result in a lower valuation, as it may not adequately take into consideration the intangible, going concern value of the business.

Adjusted Net Asset Method

The asset-based approach is best used when a business is nonoperating or has been generating losses, and the company’s focus is holding investments or real estate. The adjusted net asset method is commonly used for estimating the value of the business. The difference between the fair market value of the company’s total assets and the fair market value of its total liabilities determines the fair market value of the business.

Asset-based business valuations can be done on a going concern or on a liquidation basis.

• A going concern asset-based approach lists the business’s net balance sheet value of its assets and subtracts the value of its liabilities.
• A liquidation asset-based approach determines the net cash that would be received if all assets were sold and liabilities paid off.

 

 

Using the asset-based approach to value a sole proprietorship is more difficult. In a corporation, all assets are owned by the company and would normally be included in a sale of the business. Assets in a sole proprietorship exist in the name of the owner and separating assets from business and personal use can be difficult.

This approach is typically used where a business is not a going concern, or where a business is a going concern, but its value is tied directly to the liquidation value of its underlying tangible assets and investments.

MARKET COMPARABLE APPROACH

Market value approaches to business valuation attempt to establish the value of your business by comparing your business to similar businesses that have recently sold. The market comparable approach values your business using the average of similarly situated businesses in the same or similar industries.  The market approach offers the view of business market value that is both easy to grasp and straightforward to apply. The idea is to compare your business to similar businesses that have sold.

A market approach is a method of determining the appraisal value of an asset based on the selling price of similar items. Additionally, the market approach can be used to determine the value of a business ownership interest, security, or intangible asset.

There are two approached to market comparable method that are primarily used when valuing a business, the Guideline Transaction Method, and the Guideline Public Company Method. These methods are used to value a company based on the pricing multiples observed for similar companies that were sold or are publicly-traded.

Market multiples are revenue, EBITDA, EBIT, net profit multiple, the price-earnings ratio (PER or P/E ratio) or the Market-to-book ratio, where the multiples are always a multiple of the listed figures. With unlisted companies a comparison is made with prices paid on the stock market, however, proven to be relatively difficult.

Limitation of Market Comparable Approach

• Market data may not be available or only be available for a limited number of goods and services and may not reflect the correct value.
• The true economic value of goods or services may not be fully reflected in market transactions, due to market imperfections (organised/ unorganised) and/or policy failures.
• Seasonal variations and other effects on price must be considered.
• The market price method does not deduct the market value of other resources used to bring products to market, and thus may overstate benefits.

Pros:

• Market efficiency ensures that trading values for comparable companies serve as a reasonably good indicator of value for the company being evaluated, if the comparable are chosen wisely. These comparable should reflect industry trends, business risk, market growth, etc.
• Values obtained tend to be most reliable as an indicator of value of the company whenever a non-controlling (minority) investment scenario is being considered.

Cons:

• No two companies are perfectly alike, and as such, their valuations generally should not be identical either. Thus, comparable valuation ratios are often an inexact match. Also, for some companies, finding a decent sample of comparables (or any at all!) can be very challenging. Thus, in Comparable Companies analysis are always running the risk of “comparing apples to oranges,” never being able to find a true comparable, or simply having an insufficient set of comparable valuations from which to draw.
• Illiquid comparable stocks that are thinly traded or have a relatively small percentage of floated stock might have a price that does not reflect the fundamental value of that company.

The approach is best used when a minority (small, or non-controlling) stake in a company is being acquired or a new issuance of equity is being considered (this also does not cause a change in control). In these cases, there is no control premium, i.e., there is no value accrued by a change in control, wherein a new entity ends up owning all (or at least the majority) of the voting interests in the business, which allows the owner to control the company cleanly.

RiSiKo Consulting LLP is proud to be part of ADAM Global’s Annual Partners Meeting – from 6th to 8th of August, 2016, in Lisbon, Portugal where Leaders & Partners from 65 Countries would be joining to identify areas of collaboration and build relationships with fellow member firms.

Partner firms explore the global environment in context to ever-changing client’s requirements, and how their roles would add value in setting new benchmarks for growth of the network and its member firms.

The Indian pharmaceutical market size is expected to grow to US$ 100 billion by 2025, driven by increasing consumer spending, rapid urbanisation, and raising healthcare insurance among others.

India exports drugs to over 200 countries due to which pharmaceutical exports clocked a CAGR of 10.3 per cent to US$ 15.5 billion during 2014–15

Failure in international regulatory inspections is continuously tarnishing India’s reputation as a producer of high quality, low cost medicines. Also over the past couple of years the Indian Pharma companies have faced increased scrutiny from the regulators bringing a total of 11 warning letters being issued by the US regulator in 2015.

CPhI is glad to announce its 5th Annual Global Pharma Regulatory Summit which aims at bringing expert regulators across the globe who will share their knowledge on how to comply with regulatory guidelines for manufacturing and export quality drugs.

RiSiKo Consulting LLP has been actively involved in Pharma & Nutra Industry through various Strategic & Turnaround Advisory, RiSk management, Compliance Management, Transaction Structuring Advisory and has experience of working in various Pharma Business Environment existing in India,Dubai,USA,CIS, Europe, GCC,China, Mexico, Africa,SEA Region.

For further details on the events , please click below link :-

5th Annual Global Pharma Regulatory Summit 2016

RiSiKo believes in continuous Compliance,Process & Performance Improvement in Pharma & Nutra industry and has been part of similar events.

Arab Health Summit 2016

CPhI PAT Workshop 2016

 

To know further about RiSiKo Consulting LLP & its services across globe , please visit out website :- www.risikollp.com

Adam Global has appointed RiSiKo Consulting LLP as Strategic Partner for India region. ADAM Global is a leading Corporate Services firm, delivering International Business Solutions and a wide range of comprehensive corporate services assisting companies and entrepreneurs establish and expand their businesses seamlessly across international borders. With operations around the world delivering comprehensive business solutions, Adam Global are the global experts who understand the local needs.

With over a 100 partner and integrated offices across the Americas, Asia Pacific, Europe, Africa and the Middle East, team of expert Advisors, Accountants, Lawyer, and Financial Analysts enable clients across the globe to enhance their enterprise value and operate their business structures, finance vehicles and investment in various geographical locations with a peace of mind.

Risiko is a business consulting and advisory firm, specializing in risk management, turnaround strategies and scaling-up family managed businesses. The company caters to clients across industries and business environments within India, Dubai and USA.

This Strategic Partnership would help to create unique synergy between Lawyers, Accountants, business strategic & financial advisors and would help the clients to increase overall enterprise value and performance.

Adam Global and RiSiKo Consulting LLP are extremely confident in the future of this new venture.

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Indian Legal System has made multiple legal avenues (thorough various acts & legal provisions) to handle events of failure of businesses or insolvency or voluntary winding up, which directly & indirectly impacts employees, shareholders, lenders, small & large creditors and the broader economy.

Indian business environment which is always full of conservative old school strategy, backed up by Social & Creditors pressure, on top of that “Overprotective & Overthinking” approach which mostly leads to miscalculation in understanding the business assumption & ground reality, and ultimately results into failure in taking timely business decisions. Thereafter business house which is already not able to perform or sustain, need to go through Social & Creditors pressure under which Promoters Group drag & delay reorganization or debt restructuring or any changes of management, or new business unit or sale of investment etc. which goes on and on for long time with lenders.

Till the time when Insolvency is actually established either it’s too late or matter is stuck into the layers of Indian legal provisions such as Securitisation and Enforcement of Security or SARFAESI Act, Corporate Debt Restructuring, Sick Industrial Companies Act or SICA , Debt Recovery Tribunal or DRT. Due to involvement of multiple level of regulatory authorities at State & Central Level it becomes difficult to get any timely decision from the legal court systems to revive or to support or to actual recover and protect the interest of the parties involved. So it is important in all such cases that there is speedy closure which will help the cases which can be either restructured or sold off with less pain for all involved.

To simplify all the above difficult & tricky situation, Indian Government has decided to form a modern law which can bring speedy efficiency & clarity into the insolvency matter and same will be inspired from International Experiences like USA , UK , Germany and similar countries with efficient legal system to handle insolvency cases.

The US has a Bankruptcy Code that provides for fairly quick liquidation or re-organisation of business with what is popularly known as Chapter 7, with cases being filed in bankruptcy courts; Chapter 11, which deals with reorganisation of businesses; and Chapter 15, on cross-border insolvencies. Individual bankruptcies are dealt with separately. In the UK, once cases are filed for bankruptcies, after 12 months, there is either discharge with part of the assets being used to pay off debts, or, in situations where companies can be turned around, court-appointed administrators handle cases. The German insolvency law is applicable to both individuals and firms, with independent court-appointed insolvency practitioners helping in realising assets or re-organising the business.

RiSiKo has participated in Bankruptcy case filed under Chapter 11 with USA Delaware Bankruptcy Court as Strategic & Financial Advisor and our experiences has been amazing to see the way court proceedings are formulated in timely manners to protect the interest of Unsecured Creditors Committee (UCC), to protect the value of the assets , to reduce or to limit the pain of the person filing bankruptcy.

In India, The Bankruptcy Law Reform Committee (“BLRC” or the “Committee”) was set up by the Department of Economic Affairs, Ministry of Finance, by an office order dated August 22, 2014 to study the “corporate bankruptcy legal framework in India” and submitted a report to the Government for reforming the system. During the course of its deliberations, the Committee decided to divide the project into two parts:

• to examine the present legal framework for corporate insolvency and suggest immediate reforms, and
• to develop an ‘Insolvency Code’ for India covering all aspects of personal and business insolvency.

 

 

BLRC committee has recently submitted its draft of “The Insolvency & Bankruptcy Bill 2015” (submitted on Feb 2015) along with its recommendation report (submitted on Nov 2015).This new bill has suggested numerous changes into the legal system such as

 

 

• Changes in the Power of Secured & Unsecured Creditors providing incentives for creditors to join the collective insolvency resolution process rather than initiate individual actions
• Provision of a timeline of 180 days — extendable by 90 days — to deal with applications for resolving cases of insolvency or bankruptcy.
• During this period, the management of the distressed firm or debtor could be placed in the hands of a resolution professional — a new class of professionals equipped to deal with such cases, who would be supervised by a proposed new regulator.
• The proposal also envisages them getting into talks to revive firms, and work out a repayment plan.
• Decisions such as the economic viability of the debtor, will be determined through negotiations between the debtor and creditors – an exercise that will be facilitated by insolvency professionals.
• Draft Bill also abolishes the institution of the official liquidator, which by all accounts has been a failure in non-viable businesses.
• A Debt Recovery Tribunal will be the adjudicating authority over both individuals and unlimited liability partnership firms.
• The National Company Law Tribunal will be the adjudicating authority with jurisdiction over companies with limited liability.
• The Financial Sector Legislative Reforms Commission (FSLRC) has recommended the creation of a resolution corporation to monitor financial firms, and intervene before they go bust. The aim is to either close firms that can’t be revived, or change their management to protect investors or depositors. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The law will still need to be approved by Parliament. This is only a starting point for easing exits for debtors in distress, preserving value and providing creditors with greater certainty in outcomes.

Disclaimer – Comments, Views and Opinions herein mentioned are subject to Disclaimer & Privacy Policy of RiSiKo Consulting LLP,India.

#risikollp , #insolvency 

 

“There’s a #retirement savings crisis in the U.S. How would you address it?”

U.S. average working household has virtually no retirement savings and no planning as well. More than 38 million working-age households (45 percent) do not own any retirement account assets, whether in an employer-sponsored 401(k) type plan or an IRA. Households that do own retirement accounts have significantly higher income and wealth—more than double the income and five times the non-retirement assets—than households that do not own a retirement account.

When all households are included— not just households with retirement accounts—the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households. Two-thirds of working households age 55-64 with at least one earner have retirement savings less than one times their annual income, which is far below what they will need to maintain their standard of living in retirement.

• Public policy can play a critical role in putting all Americans on a path toward a secure retirement by strengthening Social Security, expanding access to low-cost, high quality retirement plans, and helping low-income workers and families save. Social Security, the primary edifice of retirement income security, could be strengthened to stabilize system financing and enhance benefits for vulnerable populations. Access to workplace retirement plans could be expanded by making it easier for private employers to sponsor DB pensions, while national and state level proposals aim to ensure universal retirement plan coverage. Finally, expanding the Saver’s Credit and making it refundable could help boost the retirement savings of lower-income families. (Extract of NIRS findings)

As per National Institute on Retirement Security (NIRS) research retirement savings are dangerously low, and the U.S. retirement savings deficit is between $6.8 and $14.0 trillion.

Continue reading “There’s a #retirement savings crisis in the U.S.”