Asset Based Method (NAV) The asset based method views the business as a set of assets and liabilities

that are used as building blocks to construct the picture of business value. Since every operating business has assets and liabilities, a natural way to address this question is to determine the value of these assets and liabilities. The difference is the business value. However, the Net Asset Value reflected in books do not usually include intangible assets and earning potential of the business and are also impacted by accounting policies which may be discretionary at times. Thus, NAV is not perceived as a true indicator of the fair business value. However, it is used to evaluate the entry barrier that exists in a business and is considered viable for companies having reached the mature or declining growth cycle and also for property and investment companies having strong asset base. Adjusted Net Asset method - For Calculating the Adjusted NAV, the valuer should factor in the contingent liability, Tax Shield on accumulated losses, impact of Auditor qualification and Due Diligence, money to be received from warrants, stock options and impact of corresponding shares. Book Value Method This method is similar to the book valuation method, except that the value of assets at liquidation is used instead of the book or market value of the assets. Using this method, the liabilities of the business are deducted from the liquidation value of the assets to determine the liquidation value of the business. The overall value of a business using this method should be lower than a valuation reached using the standard book or adjusted book methods. Liquidation Value Method: This form of valuation is based on the books of a business, where owners' equity i.e. total assets minus total liabilities are used to set a price. There are a couple of problems with this simplified method. First, unless you audit the business' books, you cannot be certain that the numbers presented are correct. Secondly, the value of some assets, such as buildings, equipment and furniture/fixtures, may be overstated in the books, and may not reflect the maintenance and/or replacement costs for older assets. As a result, most business valuation experts prefer to use an adjusted book value. Replacement Value Method: This type of business valuation is similar to an adjusted book value analysis. Replacement value is different from liquidation/book value in as much as it uses the replacement value of assets rather the liquidation/book value of assets which is usually higher than book/liquidation value. Liabilities are deducted from the replacement value of the assets to determine the replacement value of the business.

Since the replacement methodology assumes the value of business as if a new business is being set up, this methodology may not be relevant in the case of valuation for a going concern. Income Based Method The Income based method of valuations are based on the premise that the current value of any business is a function of the future value that an investor can expect to receive from purchasing all or part of the business. It is generally used for valuing businesses that are expected to continue operating for the foreseeable future. Capitalization of Earning Method (PECV): In its simplest form, the capitalization method basically divides the business expected earnings by the so-called capitalization rate. The idea is that the business value is defined by the business earnings and the capitalization rate is used to relate the two. The first step under this method is the determination the capitalization rate - a rate of return required to take on the risk of operating the business (the riskier the business, the higher the required return). Earnings are then divided by that capitalization rate. The earnings figure to be capitalized should be one that reflects the true nature of the business, such as the last three years average, current year or projected year excluding the impact of any extraordinary items not expected to accrue in future. While determining a capitalization rate, it is necessary to compare with rates available to similarly risky investments. Discounted Free Cash Flow Method (DFCF): The DFCF to Equity method expresses the present value of the business attributable to equity shareholders as a function of its future cash earnings capacity. This methodology works on the premise that the value of a business is measured in terms of future cash flow streams, discounted to the present time at an appropriate discount rate. The value of the equity is arrived at by estimating the Free Cash Flows (FCF) to equity and discounting the same at the cost of equity (Ke). The DFCF method using the FCF, values the benefits that accrue to the equity shareholders of the Company. This is estimated by forecasting the free cash flows available for the company (which are derived on the basis of likely future earnings of the companies) and discounting these cash flows to their present value at the Ke. The DFCF methodology is considered to be the most appropriate basis for determining the earning capability of a business. It expresses the value of a business as a function of expected future cash earnings in present value terms. The method seeks to measure the intrinsic ability of the business to generate cash attributable to its equity shareholders. In the DFCF method, the appraiser estimates the cash flows of any business after all operating expenses, taxes, and necessary investments in working capital and capital expenditure is being met. Valuing equity using the free cash flow to stockholders requires estimating only free cash flow to equity holders, after debt holders have been paid off. As this methodology is focused at Equity Shareholders so the interest and finance charges are also deducted.

An alternate to above is Discounted Free Cash Flow to Firm (DFCF to Firm) that measures the Enterprise Value. No adjustment is made for Debt (Inflows and Outflows) for arriving at the DFCF to Firm. Rather Debt outstanding as on Valuation date is deducted from the Enterprise Value to arrive at DFCF to Equity. Also, in lieu of 'Ke', 'WACC' is used to discount the Cash Flow. Market Based Method In this method, value is determined by comparing the subject, company or assets with its peers in the same industry of the same size and region. Most Valuations in stock markets are market based. This is also known as Relative Valuation Method This method is easiest to use when large number of assets comparable to the one being valued, assets are priced in the market, and there exist some common variable that can be used to standardize the price. Comparable Company Market Multiples Method (CCM): Comparable Company Market Multiple uses the valuation ratio of a publicly traded company and applies that ratio to the company being valued. The valuation ratio typically expresses the valuation as a function of a measure of financial performance or Book Value (e.g. Revenue, EBITDA, EBIT, Earnings per Share or Book Value). This technique hinges upon the efficient market theory which indicates that the price of exchanged securities reflects all readily available information, as well as the supply and demand effects of educated and rational buyers and sellers. In other words, the market is continuously evaluating each company and expressing that valuation in bids and offers for its stock. Therefore, in a perfect world, the market has already done most of the work for you. When using this method, all publicly-traded companies are reviewed in order to identify a peer group similar to the subject company. Once the peer group and proper multiples are determined, the premium paid over the calculated market must be decided based on the variety of factors. A key benefit of Comparable Company Market Multiple analysis is that the methodology is based on the current market stock price. The current stock price is generally viewed as one of the best valuation metrics because markets are considered somewhat efficient. The difficulty here is in the selection of a comparable company since it is rare to find two or more companies with the same product portfolio, size, capital structure, business strategy, profitability and accounting practices. Whereas no publicly traded company provides an identical match to the operations of a given company, important information can be drawn from the way similar enterprises are valued by public markets. Comparable Transaction Multiples Method (CTM): With this technique of valuing a company for a merger or acquisition, the transactions that have taken place in the industry which are similar to the transaction under consideration are taken into account. With the transaction multiple method, similar acquisitions or divestitures are identified, and the multiples implied by their purchase prices are used to assess the subject company's value.

The greatest impediment in finding truly comparable transactions is the absence of available information on private transactions. In addition to the lack of information on the sales of private companies, the available information in public transactions may be outdated. There is no rule of thumb for the appropriate age of a comparable transaction, although one should be aware of the competitive market at the time of the transaction and factor any changes in the marketplace environment into the analysis. The more recent the transaction, the better this technique, with all other things being equal. Market Value Method (For Quoted Securities) The Market Value method is generally the most preferred method in case of frequently traded Ordinary Shares of Companies listed on Stock Exchanges having nationwide trading as it is perceived that the market value takes into account the potential of any Company. Other Methods Contingent Claim Valuation: Under this valuation approach, Option Pricing Model is applied to estimate the Value. Generally ESOP Valuation for Accounting purpose is done using the Binomial Option Pricing model. Price of Recent Investment Method (PORI): The recent investment in the business is often taken as the base value if there are no substantial changes since the last investment.

The quality of any value analysis or value appraising is a function of the accuracy of the data and assumptions that form the basis for any conclusion reached. Estimates of a business' value by various experts can vary significantly, if the fundamental assumptions are applied differently.

In fact, value of a business depends on numbers of factors in addition to purposes of valuation, like nature of industry under which the business is working, economic situations, market trends, availability and reliability of data etc.