Guidelines for selecting a valuation service provider.

Choosing the best valuation service provider is a crucial decision for business and investor who need independent valuation of an asset or businesses. A valuation will often need to be performed for financial reporting purposes, mergers and acquisitions, raising capital, through to regulatory processes, or the purchase and sale of assets.

This means selecting a provider on the basis of professional fees or the amount of value they put on the deal may not be a reliable indicator. The quality of a valuation will depend on the provider's expertise, experience, independence, approach and grasp of the assignment.

This is a complete guide to help you identify the key factors for selecting a valuation service provider in India.

1. Verify your Professional Qualifications and Registration

The first step is to check the professional registration of the provider and that they are competent and authorized to provide the required valuation.

In case of valuations to be performed under section 247 of Companies Act, 2013 and Rules made there under, under Companies (Registered Valuers and Valuation) Rules, 2017 appointment shall be as per the provisions of the Companies Act, 2013 & Rules made there under.

In India IBBI registered valuers are authorised to carry out valuation of assets falling under following three primary asset classes:

Land and Building: Residential, commercial, industrial, and other properties.

Plant and Machinery: Manufacturing equipment, industrial machinery, production facilities, and related assets.

Securities or Financial Assets: Shares, securities, financial instruments and other financial assets eligible for the operation.

A provider's registration should correspond with the class of asset being assigned. Don't assume registration in one class allows a professional to carry out valuations in a different class. Ensure you check what is required for the purpose of valuation.

2. Review Related Industry Experience

Professional registration should be an important factor to consider but experience with this type of task is as well. A provider who is familiar with the location of a venture or asset is more likely to know what affects it's value.

For instance, when putting a value on a manufacturing plant the evaluator should know the capacity of equipment, the age and condition of the equipment, what it would cost to replace the equipment, and how quickly new technology could replace the old. To value a startup the evaluator might analyse revenues, number of customers, potential market size, financing needs and risks.

Before making a selection, review what the provider has done in terms of asset classes, industries, transaction types, valuation purpose, and experience with assets similar to yours before selecting one. Inquire about their past assignments and the valuation issues they've faced.

3. Assess Independence and Professional Ethics

The valuation should be independent of what is the taxpayer's desired result, of investor sentiment or other stakeholder pressures.

Be cautious of providers who guarantee a particular valuation amount before reviewing the relevant information. A professional valuation should be based on evidence, assumptions, and independent judgement rather than a predetermined result.

The IBBI framework includes requirements relating to professional competence, integrity, independence, and disclosure of conflicts. It also prohibits registered valuers from charging success fees for independent valuation assignments.

4. Learn How the Valuation Is Done

A good valuation provider will be able to describe what approach they recommend be used to value the asset or business and why they think it is right.

The three most frequently employed methods of valuation are:

Market Approach: Valuation based on public and private market data on similar assets or comparable businesses. Best suited when good data on comparable assets or businesses is available.

Income Approach: Calculates value by considering future benefits of ownership, which may be in the form of income or cash flow. Discounted cash flow ("DCF") analysis is most often used to value a business with reasonably supportable financial forecasts.

Cost Approach: Provides an opinion of value based on the cost to replace or reproduce an existing asset, less depreciation.

The provider should not adopt a method just because it is convenient. The selection of approach should be based on the nature of the asset, the purpose of the valuation, what information is available and market circumstances. If applicable, more than one approach may be used to cross check the conclusion.

5. Read the Scope of Services and Deliverables

Before appointing a valuation provider, clearly understand what the engagement includes.

A professional valuation assignment may involve document review, financial analysis, asset inspection, market research, discussions with management, application of valuation methods, and preparation of a detailed report.

The engagement letter should include and define the assets or interests being valued, valuation purpose, valuation date, intended users of the valuation, scope of work to be completed, required information, deliverables, time frame and responsibilities of the client and valuation firm.

It may also specify whether the fee covers site visits, technical specialists, further research, or experts' analysis. This can help avoid any surprises with the fee later on in the job.

6. Review the Quality of Valuation Report

The valuation report is the primary document where you should find out about the grounds for the estimated value. Once you have appointed the provider ask for information about the content and format of its reports. If you can, examine an anonymised example.

A good report will always state the purpose of the valuation, provide an introduction to the asset or the business, list the valuation date, methodology, sources of information, assumptions, key factors and then arrive at the value conclusion.

Reporting under the Companies (Registered Valuers and Valuation) Rules, 2017 As far as reporting requirements under Companies (Registered Valuers and Valuation) Rules, 2017 are concerned, then Rule 8 deals with the information that must be covered in the report such as inspection, investigation, valuation methods used, conflicts and limitations.

The report should be comprehensible, correctly justified and fit for its purpose. If a document shows nothing more than a final value that was obtained, it is unlikely that this document provides users with enough information.

7. Compare Professional Fees and Timelines

The price is important but not necessarily the most competitive quotation must be the decisive criterion for selection. Valuation fee can be calculated on the Asset class, when is it required an assignment, the number of assets, the information to be provided, the research required, the speed of delivery.

At the outset, when looking at quotations see if the pricing includes professional fees, travel, site visits, third parties, further analysis and taxes. Clarify when the work is expected to be completed and how it will be paid.

For example: one provider might quote a value of ₹75,000 for a machinery valuation, while another quotes of ₹1 lakh. The value difference may be because the number of assets covered, inspection levels, technical analysis, report detail, etc., will differ between the two. Comparing scope is more useful than comparing charges.

8. Check Communication and Data Confidentiality

A good valuer should keep the client informed, throughout the valuation process. Clarify the basis of the valuation and seek clarification when in doubt. Request information, if any, required, discuss material assumptions and inform clients of any delays or restrictions.

Likewise, confidentiality is a key issue as valuation assignments may concern sensitive financial statements, business projections, owners, the terms of transactions and other commercial secrets.

Before disclosing any documents, be aware of the provider's policies in relation to how confidential information will be stored, accessed and used. The engagement should explicitly specify what the confidentiality obligations are and the ways in which the information and report may be used.

9. Consider the Provider's Ability to Handle Complex Assignments

Certain valuations demand skills that aren't within the expertise of only one professional. For instance: a business valuation can require financial modelling, assessment of intangible assets, market research or evaluation of machines.

Where necessary the provider should be able to engage relevant experts or other registered valuers (on the provider's behalf) to assist them. Their involvement should be disclosed in the report (if such a report is required).

Professional judgement is demonstrated by the ability of a provider to recognize the boundaries of its expertise and to facilitate the necessary specialist input.

Conclusion

Selecting the right valuation service provider requires a careful assessment of professional qualifications, relevant experience, independence, valuation methodology, reporting quality, fees, and communication.

For assignments requiring an IBBI registered valuer, businesses should verify the professional's registration in the relevant asset class and ensure that the appointment meets the applicable requirements. They should also agree on the scope, valuation date, deliverables, and timeline before the work begins.

Ultimately, a suitable valuation provider is not simply one who offers a competitive quotation. It is one who delivers an independent, well-reasoned, transparent, and properly documented valuation that meets the purpose of the assignment.