Valuation and its Domain

There is always a discussion on the valuation that is it an Art or Science.  However –

‘Valuation is neither a pure Art nor a pure science but a perfect combination of both.’

Art refers to a diverse range of human activities, creations, and expressions that are appealing to the senses or emotions of a human individual.

Science is the effort to discover, and increase human understanding of how the physical world works through controlled methods. Such methods include experimentation that tries to simulate natural phenomena under controlled conditions and thought experiments.

In the valuation process, Valuer values the organization by using technology, applying specific methods of valuation (which can be termed as part of Science) and his own experience in taking various assumptions i.e. an Art.

Purpose of Valuation

The value of an asset or Business depends on the intended purpose of the valuation; therefore, the same business often has different values depending on the purpose of valuation.

The same company, with the same valuation date will be valued differently depending on the Purpose. Because the purpose has a dominant impact on the valuation process and the valuation result hence a single valuation cannot serve more than one Purpose.

A valuation is undertaken for one or more purposes for example

1. Selling your business at the Fair Market Value

2. Plan for a merger, acquisition or stock offering

3. Fair Market Valuation of an asset to a  lender extending business loan

4. Admission or retirement of a partner in a business

5. Transfer of the business into a trust or create a succession plan

6. Determine the value of assets and liabilities for a divorce settlement

7. Assist attorneys in litigation

8. Settlement of an insurance claim

9. Dispute resolution in cases where damages must be determined for the lost value of a business, such as breach of contract, patent infringement, franchise disputes, antitrust suits, eminent domain, lender liability, and dissenting stockholder suits.

10. Set up an Employee Stock Ownership Plan (ESOP), etc.

The purpose of valuation can be broadly classified in the four categories.

1. Valuation for transactions- Business purchase , business sale, M&A (Mergers & Acquisition), reverse merger, Recapitalization, Restructuring, LBO (Leverage Buy Out), MBO (Management Buy Out), MBI (Management Buy In), BSA (Buy Sell Agreement), IPO, ESOPs, Buy back of shares, project financing and others

2. Valuation for court cases- Bankruptcy, contractual disputes, ownership disputes, dissenting and oppressive shareholder cases, divorce cases, intellectual property disputes and other

3. Valuation for compliances- Fair value accounting, Tax Issues 

4. Valuation for planning-Personal financial planning, M&A planning, strategic planning

There are a number of situations in which intangible assets and intellectual property may need to be valued.  These include: 

• Acquisitions- particularly where a significant portion of the value of the acquisition is not intangible assets. There is often a requirement that financial statements properly reflect assets acquired – tangible or intangible
• Bankruptcy- where claims may be made as to the significant value of intangibles
• Financing –where intellectual property can be used as loan collateral or as the basis for a financing structure
• Income Taxes where the foreign subsidiaries of parent companies gain income using the intellectual property of the parent
• Infringement Lawsuits- where value must be attributed as a result of infringement of intellectual property
• Tax Assessments- covering a range of taxation considerations including capital gains tax, stamp duty etc. 
• Joint Ventures –where contributions to the venture may be a mix of tangible and intangible assets
• Licensing Arrangements-where the relationship between existing intangibles and future income is determined
• Marital Dissolutions- where businesses that are part of marital property often possess proprietary intangible assets
• Property Taxes where there can be confusion between the relative contributions of real property value and intangible asset value 
• Management Support and Presentation- Enabling an assessment of a company’s return on assets and the performance of management, strengthening balance sheet presentations and advising shareholders of the financial position of the company including hidden” assets. 

There is a huge scope of valuation, that facilitate to the Individuals   HUF, AOP, Firms: Registered, Unregistered, LLP, Public and Private Trusts and by Trustees, Limited Companies.  Listed/Unlisted, Private/Public) ,Public Sector Undertaking and Independently owned and operated by State & Local Bodies ( Primary & Public Health Services, Water, ETP Facilities etc.), Business houses and  other stake holders.