Understanding Business Valuations in Indian Markets

Business valuation is both art and science. For NRI and HNI investors evaluating opportunities in India, understanding valuation drivers is essential to making informed decisions. This guide covers the key methodologies, typical multiples, and factors that influence valuations in India's private markets.

Valuation Methodologies for Private Businesses

Unlike public markets where prices are set by trading, private business valuations require estimation. Three primary methodologies are commonly used:

1. Earnings-Based Valuation (EBITDA Multiple)

The most common approach for profitable traditional businesses. Valuation = EBITDA × Multiple.

Advantages:

• Based on actual, demonstrated earnings
• Easy to benchmark against comparable transactions
• Accounts for operational efficiency

Limitations:

• Doesn't account for capital intensity differences
• Can be manipulated through accounting choices
• Ignores balance sheet strength/weakness

2. Seller's Discretionary Earnings (SDE) Method

Often used for smaller, owner-operated businesses where owner compensation significantly affects reported profits.

SDE = Net Profit + Owner Salary + Owner Benefits + Depreciation + Interest + One-time expenses

For businesses with revenue under ₹10 crore, SDE multiples typically range from 2-4x, depending on growth potential and transferability.

3. Discounted Cash Flow (DCF)

Projects future cash flows and discounts them to present value. Most theoretically sound but highly sensitive to assumptions.

Key inputs:

• Revenue growth projections (typically 5-10 year horizon)
• Margin assumptions
• Capital expenditure requirements
• Discount rate (cost of capital)
• Terminal value assumptions

DCF is valuable for businesses with visible growth trajectories but unreliable for businesses with uncertain futures.

Factors That Increase Valuation

Beyond the basic methodology, specific factors command premium valuations:

Revenue Quality

• Recurring revenue: Subscription or contract-based revenue valued higher than transactional
• Customer diversification: No single customer >15% of revenue
• Low churn: High customer retention indicates product/service stickiness
• Pricing power: Ability to pass on cost increases

Growth Trajectory

• Historical growth: 15%+ annual growth commands premium
• Market position: Category leaders valued higher than followers
• Addressable market: Large TAM with clear expansion path
• Unit economics: Improving margins as scale increases

Operational Strength

• Management depth: Not founder-dependent
• Documented processes: Scalable operations
• Technology systems: ERP, CRM, and data infrastructure
• Clean financials: Audited statements, GST compliant, minimal cash transactions

Strategic Value

• Proprietary technology/IP: Patents, trade secrets, unique capabilities
• Distribution network: Hard-to-replicate market access
• Licenses/approvals: Regulatory barriers to entry
• Brand value: Consumer recognition and loyalty

Factors That Decrease Valuation

Certain characteristics consistently reduce valuations:

Negotiating Valuation: Bridging the Gap

Buyers and sellers often have different valuation expectations. Common mechanisms to bridge gaps:

Earnouts

Portion of price contingent on future performance. Example: ₹30 crore upfront + ₹10 crore if FY26 EBITDA exceeds ₹5 crore.

Structure Considerations

• CCPS (Compulsorily Convertible Preference Shares): Provides downside protection with equity upside
• Anti-dilution provisions: Protection against future down-rounds
• Liquidation preference: Priority in exit proceeds

Control vs. Minority Stakes

Control premiums of 20-30% are common when acquiring majority stakes. Minority investments often include protective provisions (board seats, veto rights, information rights) to offset lack of control.

Regional Considerations for India

India's private markets have specific characteristics investors should understand:

Formalization Premium

Businesses with clean, audited financials and full GST compliance command 20-30% premium over comparable businesses with informal practices. This premium reflects lower risk and easier exit path.

Family Business Dynamics

Many traditional businesses are family-owned. Investors should assess:

• Succession planning clarity
• Family involvement in operations vs. governance
• Related party transactions
• Alignment between family members

Exit Considerations

India's limited secondary market for private shares means exit planning is crucial:

• Strategic sale to larger players
• IPO pathway (typically requires ₹100+ crore revenue)
• Secondary sale to later-stage investors
• Promoter buyback provisions

Using Hathwell's Valuation Calculator

To help business owners and investors get preliminary valuation insights, we've built a Business Valuation Calculator that considers:

• Company stage (pre-revenue, revenue-generating, post-first-round)
• Industry and sector characteristics
• Financial metrics (revenue, EBITDA, growth rate)
• Qualitative factors (management, market position, systems)

While no calculator can replace professional valuation, it provides a useful starting point for discussions.

How Hathwell Approaches Valuation

When evaluating investment opportunities, our approach to valuation:

• Multiple methodologies: We triangulate using EBITDA multiples, DCF, and comparable transactions
• Normalization: We adjust for non-recurring items, related party transactions, and owner compensation
• Quality assessment: Premiums/discounts based on PRIME framework evaluation
• Structure optimization: Selecting instruments that align risk/return for both parties
• Exit modeling: Valuation considers realistic exit scenarios and timelines

We share our valuation rationale transparently with investors, explaining our assumptions and the factors driving our recommended investment terms.