STUDY MATERIAL PROFESSIONAL PROGRAMME VALUATIONS & BUSINESS MODELLING MODULE 3 ELECTIVE PAPER 9.7 i © THE INSTITUTE OF COMPANY SECRETARIES OF INDIA TIMING OF HEADQUARTERS Monday to Friday Office Timings – 9.00 A.M. to 5.30 P.M. Public Dealing Timings Without financial transactions – 9.30 A.M. to 5.00 P.M. With financial transactions – 9.30 A.M. to 4.00 P.M. Phones 011-45341000 Fax 011-24626727 Website www.icsi.edu E-mail [email protected] Laser Typesetting by AArushi Graphics, Prashant Vihar, New Delhi, and Printed at SAP Printers, Mumbai/February 2020 ii PROFESSIONAL PROGRAMME VALUATIONS & BUSINESS MODELLING A business valuation provides the management of business with numerous facts and figures pertaining to the actual worth or value of the company in terms of market competition, asset values and income values. The key benefits of business valuation are: Better Knowledge of Company Assets; Understanding of Company Resale Value; Assistance during Merger & Acquisitions; Obtain a True Company Value and Access to More Investors. With the surge in business activities, valuations have occupied the centre stage. Whether it is a start-up or a big corporate house, valuations is pervasive. Right from the setting up of the business entity, during its merger and acquisitions, for obtaining long-term finance from banks / financial institutions, winding-up and for various other business purposes, valuation is an integral component. There are various vital dimensions associated with the valuation- International Valuation Standards; Guidance to Valuation; Methods used in Valuation; Valuation of Tangibles and Intangibles; Valuation during Mergers & Acquisitions etc. In order to have a holistic approach on valuation and to surmount over valuation related matters, it is extremely essential that a professional needs to be conversant with the aforesaid elements of valuation. Merely possessing the theoretical knowledge on the subject will not suffice as it is like a applied research wherein every element of valuation has a practical relevance. Moreover, depending on the magnitude, nature and scale of the business different valuation approaches needs to be embraced. Another concept that has gained steam is Business Modelling. Despite presence of various resources, i.e. finance, human, material, technology etc. in abundance if the business organisation is devoid of a robust business model then either it may not attain the desired level of performance or collapse during turbulence. Perhaps financial giants like Lehman Brothers and other investment banks would not have collapsed due to the onslaught of global economic crisis had they were having sound business models. Business models to be sustainable needs to be revised in light of the changing legal, business and economic environment. It needs to be developed by using scientific approach rather than rule of thumb. Approaches like, spreadsheet techniques, future projections, analysis of key financial ratios, cash flow analysis, estimation of maximum finance required, working capital management etc. may assist immensely in building a robust and sustainable business model. Company Secretary Profession have witnessed a drastic metamorphosis. From a ‘Glorified Clerk’, they have attained the status of ‘Governance Professionals’. In other words, the trajectory of the Company Secretary Profession have moved upward when one compares his / her role under Indian Companies Act, 1956 and Indian Companies Act, 2013. Without an iota of doubt it can be opined that Indian Companies Act, 2013 have been a game changer for the Company Secretaries. Since the role of a Company Secretary in the capacity of a ‘Registered Valuer’ has been duly recognized under the Companies Act, 2013, consequently, it has added wings to the profession. An in-depth knowledge of the subject will definitely assist a Company Secretary-in-Making to explore career opportunities in the areas of Valuations and Business Modelling. Days are gone when technical areas like valuation and business modelling were the forte of selected group of experts. Today, a Company Secretary is competent enough to undertake valuation related activities. In the era which is marked by soaring merger and acquisitions, particularly, cross-border merger and acquisitions, a iii comprehensive knowledge of the subject will play a pivotal role in understanding the finer aspects of merger and acquisitions, like valuation of tangibles, valuation of intangibles etc. Similarly during winding-up process, there is a need for valuation of various assets and in absence of proper understanding on the key concepts of valuation, it will be next to impossible for a Company Secretary to execute the valuation process. Any business be it of any magnitude, it can only attain excellence, when it is sustainable. For a business to be sustainable it needs a robust business model. Like on the rails the train runs and if the rails are of abysmal quality then there is a probability of derailment, similarly, if a company does not have a sound business model, then in the long run, the survival of the company may be difficult. Further, in this dynamic business eon, where only constant thing is change, it is extremely important that business organizations change or develop new business models as and when the need arises. For instance, if a company is operating in an industry which is having an oligopoly form of market competition and due to entry of more firms, it transforms into monopolistic form of market competition, then the business organization may have to either change or start from the scratch its business model. A Company Secretary being the ‘Key Managerial Personnel’ of the company and being an indispensable human capital of the company, it is essential that he / she must possess deep insights regarding various forms of business models, factors determining a robust business model, MS-Excel applications of various finance functions etc. In view of the aforesaid matter, this subject will act as a ‘Lighthouse’ in guiding the Company Secretaries while performing valuation and business modelling related activities. Although due care has been taken in publishing this study material, yet the possibility of errors, omissions and/ or discrepancies cannot be ruled out. This publication is released with an understanding that the Institute shall not be responsible for any errors, omissions and/or discrepancies or any action taken in that behalf. Should there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged if the same are brought to its notice for issue of corrigendum in the e-bulletin Student Company Secretary. In the event of any doubt, students may write to the Directorate of Academics in the Institute for clarification at [email protected]. There is open book examination for this Elective Subject of Professional Programme. This is to inculcate and develop skills of creative thinking, problem solving and decision making amongst students of its professional programme and to assess their analytical ability, real understanding of facts and concepts and mastery to apply, rather than to simply recall, replicate and reproduce concepts and principles in the examination. iv PROFESSIONAL PROGRAMME MODULE 3 ELECTIVE PAPER 9.7 VALUATIONS & BUSINESS MODELLING (MAX MARKS 100) SYLLABUS Objectives Part I : To develop a reservoir of knowledge on valuation which can assist the Company Secretaries in undertaking valuation assignments as a Registered Valuer under Companies Act, 2013 including for Mergers and Acquisitions, Issue of Shares, Winding up of Business and during Distressed Sale. Part II : To assist the student in comprehending the concept of Business Modelling, its vital components, steps involved in preparation of a Business Model and Business Models for varied magnitude of business organizations. PART 1: VALUATIONS (70 MARKS) Detailed Contents 1. Overview of Business Valuation : Genesis of Valuation; Need for Valuation; Hindrances/ Bottlenecks in Valuation; Business Valuation Approaches; Principles of Valuation (Cost, Price and Value). 2. Purpose of Valuation : M&A, Sale of Business, Fund Raising, Voluntary Assessment; Taxation; Finance; Accounting; Industry perspective; Statutory Dimension; Society Angle. 3. International Valuation Standards Overview. 4. Valuation guidance resources in India. 5. Business Valuation Methods: Discounted Cash Flow Analysis (DCF); Comparable transactions method; Comparable Market Multiples method; Market Valuation; Economic Value Added Approach; Free Cash Flow to Equity; Dividend Discount Model; Net Asset Valuation; Relative Valuation; Overview of Option Pricing Valuations. 6. Steps to establish the Business Worth: Planning and Data Collection; Data Analysis and Valuation including review and analysis of Financial Statements; Industry Analysis; Selecting the Business Valuation Methods; Applying the selected Valuation Methods; Reaching the Business Value Conclusion. 7. Valuation of Tangibles: Overview of Valuation of Immovable Properties; Plant & Machinery; Equipments; Vehicles; Capital Workin-Progress; Industrial Plots; Land and Buildings; Vessels, Ships, Barges etc. 8. Valuation of Intangibles: Definition of Intangible Assets; Categorization of Intangibles- Marketing Related (Trademarks, Trade names, Certification marks, Internet domains etc.), Customer or Supplier Related (Advertising Agreements, Licensing, Royalty Agreements, Servicing Contracts, Franchise Agreements), Technology Related (Contractual or non-contractual rights