Recently, OYO-backed Innov8, a flexible workspace business, raised Rs. 110 crore in funding for its expansion plans. An impressive business valuation of Rs. 1000 cr. created investor interest. But, such an outcome is a result of many key considerations. For instance, Innov8 earned a net profit of Rs. 67 cr. in FY24 compared to Rs. 2.5 cr. in FY23. This vertical leap in profit margins contributed to the valuation.
In this context, we dive deeper into important criteria for corporate valuation. Stay tuned for our blog series on a comprehensive guide for company valuation.
The valuation of a business is the process of determining a company’s economic worth using standardized methods. It serves purposes like mergers, acquisitions, taxation, financial reporting, and dispute resolution. Accurate valuation aids stakeholders in making informed decisions and enhances financial transparency.
Factors such as financial performance, assets, liabilities, market position, and growth potential determine a business' value. Certified valuation analysts assess these elements to estimate a company’s value.
The factors defining business valuation vary with the valuation purpose. A business is not only valued for sale/buy/mergers. There are other purposes like taxation, dispute settlement, more funding, better planning, or allotment of fresh shares. Let’s examine a comprehensive list of valuation factors.
A pivotal factor in corporate valuation is its financial performance such as earnings before interest tax depreciation and amortization (EBITDA).
A company with a high profit margin holds greater value. It indicates that the company has distinctive offerings, such as distribution network, brand value, better R&D, economies of scale, and forward or backward integration.
Company size plays a role in valuation. Bigger operating units generally enjoy economies of scale and have high bargaining power over its suppliers leading to increase in margins. For instance, market leaders in cement production - Ultratech cement, Shree cement - enjoy better margin over its peers.
Certified valuation analysts take into account non-core assets and liabilities as on the valuation date arriving at the valuation of the company. Such non-core assets and liabilities include investments in mutual funds, equity share, surplus, disputes, claims, and surplus land parcels.
Observing a company's revenue over time provides insight into its performance, market conditions, and growth potential. Company valuation companies use it during the evaluation. Project-based revenue is more valuable than recurring revenue.
Internal and external risks may degrade the value of a business. Some risks are changes in consumer taste and management team, acquisition risk, internal control, quality checks, compliance to regulatory norms, etc.
New companies will have a lower valuation than established companies with a customer base, brand recognition, tested business model, R&D, supplier relationships, intellectual property and profitability history.
A company showing good traction i.e. high growth rates is likely to have higher value.
Business valuation takes location into account. Moreover, location affects market potential, real estate value, customer access, brand image, cost to company in terms of raw material procurement, distribution network, labour availability, water, electricity and other requisites of the business process.
Many investors eye the team before making an investment decision. A team of experienced or high profile professionals helps in gaining initial traction. A top-notch team attracts higher business valuation as the likelihood of the company's success is higher.
Greater market share the company captures, higher is its value. It has an impact when the investor interest lies in the same market. For example, Asian paints had major market share in the paints industry and enjoyed premium valuation. Market entry of JSW with massive capex eroded market value of Asian paints.
Certified valuation analysts consider the value of intellectual property, even if not accounted for in the balance sheet, during corporate valuation.
A qualitative factor in business valuation, reputation can either boost or degrade a company’s value. Reputation may be from the perspective of customers, suppliers, employees, regulators, government, and other stakeholders.
If large quantities of sales result from a few key customers then it can affect the company’s worth negatively. When a company's revenue is controlled towards a few customers, losing a customer will lead to a significant loss in revenues, which may affect the company's valuation.
The value of similar companies in the market can be the basis of relative business valuation. EV/EBITDA or EV/Capacity in tonnage of the companies in cement industry provides an industry-wide benchmark for relative valuation.
A company will generally receive higher valuation in a high-performing economy than a weak economy. For example, companies operating in India will command better valuation than companies in African countries.
An industry determines the business valuation. A company has a higher value in an industry with high investor demand than a company, at the same development stage and traction, in an industry with low demand. For instance, companies with AI integration and AI-enabled services are commanding premium valuation than IT-enabled service companies.
A larger market size commands higher investment. If your company belongs to a bigger market, there are chances of higher valuation and vice versa. A higher demand market with low supply increases investor interest. However, a company will interest investors in an oversaturated market with high competition, only if it has a distinct advantage.
The value of a business increases or decreases with the existing legal and regulatory environment and to the extent the company complies with it.
Different sectors in India may have unique valuation metrics due to industry-specific factors.
Financial, operational, and market factors determine business valuation. Key elements, such as revenue trends, intellectual property, and industry demand, determine a company’s worth. The process begins by defining its purpose, as different goals adopt different factors. Understanding these factors strengthens decision-making and supports long-term growth and stability. Engaging certified valuation analysts ensures a comprehensive assessment.
