Start with the purpose and the security

An unlisted share does not have the continuous quoted price of an exchange-traded share. A valuation therefore brings together business information, the rights attached to the holding and the purpose of the exercise. The first discussion should establish the company, the class of security, the valuation date and the intended use of the report.

For an Indian transaction, share the proposed structure with the valuer and your transaction advisers early. An investment discussion, a financial reporting exercise and a regulatory requirement can pose different valuation questions. The applicable requirements and appropriate professional appointment should be established for the particular matter.

Three ways of looking at the evidence

An income approach considers expected future economic benefits, commonly through a cash flow analysis. A market approach looks at relevant transactions or comparable businesses. An adjusted net asset method considers the company's assets and liabilities. The nature of the business and the quality of available information influence which techniques are useful.

The IFRS Foundation's educational material on unquoted equity illustrates these approaches in a financial reporting context. It does not prescribe one technique for every investment. That is a useful general lesson: method selection requires judgement. The material is not a substitute for the requirements applicable to an Indian transaction.

The terms deserve as much attention as the accounts

Share classes can carry different voting, dividend, conversion and liquidation rights. A recent investment can offer useful evidence, but its terms and timing need examination before its price is applied to another holding. A simple calculation based on ownership percentage may miss material differences between the instruments.

A well-prepared information pack should include the current capitalisation table, relevant shareholder agreements, financial statements and business forecasts. Highlight recent share issues, transfers and changes in the business. This helps the valuer assess the relevance of each piece of evidence.

Look for an explanation you can follow

A useful valuation report makes its purpose, methods, assumptions and limitations clear. The reader should be able to understand why the selected evidence is relevant and how it supports the conclusion. That explanation is what allows the valuation to inform a considered decision.