Business Valuation: When and Why It Is Required

What is business valuation?

Business valuation is the process of estimating the economic value of a business, ownership interest, security or intangible asset. It draws on financial analysis, industry and economic context, and recognised valuation methodologies to arrive at a reasoned opinion of value as at a specific date, for a specific purpose.

When is a valuation typically required?

• Regulatory and statutory purposes: including transactions under the Companies Act, 2013 (such as issue of shares, mergers and other corporate restructuring) and matters arising under the Insolvency and Bankruptcy Code, 2016.
• Tax purposes: including transactions covered under the Income-tax Act where fair market value must be determined.
• Transactions: mergers, acquisitions, share transfers, buy-backs and fund-raising, where parties need an independent view of value.
• Dispute resolution and family settlements: where an independent valuation supports negotiation or adjudication.
• Financial reporting: including purchase price allocation and impairment assessments under applicable accounting standards.

Who can carry out a valuation?

For many regulatory purposes, valuation must be performed by a Registered Valuer empanelled with the Insolvency and Bankruptcy Board of India (IBBI), operating within a recognised asset class — such as securities and financial assets, land and building, or plant and machinery. The valuer applies recognised approaches — broadly, the income approach, the market approach and the asset (cost) approach — selecting and weighting them based on the nature of the business, the purpose of the valuation and the information available.

What does a valuation exercise involve?

A typical valuation assignment involves understanding the business and the purpose of the valuation, reviewing financial statements and projections, considering comparable transactions or listed comparables where relevant, and preparing a valuation report that sets out the basis, methodology, assumptions and conclusion of value.

This article is for general information only and does not constitute professional or valuation advice. The appropriate methodology and applicable regulatory requirements depend on the specific facts and should be discussed with a qualified professional.