Business Valuation Methods explained: this guide covers what Business Valuation Methods means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Business valuation determines the economic value of a company or business unit. In India, valuation is required for M&A transactions, FDI/ODI compliance under FEMA, SEBI regulations, IBC resolution plans, ESOP pricing, and tax purposes. The Companies Act 2013 (Section 247) mandates Registered Valuers for specified purposes.
Why Valuation is Required
- Issue/transfer of shares (FDI — RBI FEMA rules)
- ESOP grant pricing (for tax purposes)
- Mergers, demergers — swap ratio determination
- IBC — liquidation value and fair value for resolution
- Section 56(2)(x) — shares issued above/below FMV (angel tax)
- Goodwill impairment (IND AS 36)
Method 1: Discounted Cash Flow (DCF)
DCF calculates the present value of expected future free cash flows (FCF) discounted at the Weighted Average Cost of Capital (WACC).
- Forecast FCF for 5-10 years
- Calculate Terminal Value (Gordon Growth Model: FCF × (1+g) / (WACC - g))
- Discount at WACC to get Enterprise Value (EV)
- EV minus Net Debt = Equity Value
- Best for: Stable cash-generative businesses
- Limitation: Highly sensitive to terminal growth rate and WACC assumptions
Method 2: Comparable Company Analysis (CCA/Comps)
Values the business using trading multiples of comparable listed companies:
- EV/EBITDA, EV/Revenue, P/E multiple
- Select 5-10 comparable companies; calculate median multiple
- Apply multiple to subject company's EBITDA/Revenue
- Best for: Businesses in sectors with active listed peers
Method 3: Asset-Based (Net Asset Value)
Values the business based on net assets at fair value: Total Assets (at FMV) minus Total Liabilities = NAV.
- Applicable for holding companies, real estate companies, investment firms
- Going concern NAV uses book values adjusted for fair value
- Liquidation NAV uses forced sale values
Method 4: Precedent Transaction Analysis
Uses multiples from past M&A transactions in the same sector. Typically commands a control premium over CCA (20-30%).
Startup Valuation Methods
| Method | Description |
|---|---|
| Pre-money/Post-money | VC investment valuation: Post-money = Pre-money + Investment |
| Berkus Method | Assigns value (up to $500K each) to: idea, prototype, team, strategic relationships, rollout |
| Revenue Multiple | For SaaS: 5-20x ARR depending on growth rate |
| Market Size (TAM/SAM) | Potential revenue × market share assumption |
Registered Valuer — Companies Act 2013
Valuations for company law purposes (mergers, buy-back, ESOPs, Section 62 FPO) must be done by a Registered Valuer registered with IBBI. Valuation for tax purposes (FMV for shares) follows Rule 11UA of Income Tax Rules.
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