Valuation - Sole Proprietorship

Just take a note of the liabilites that you will be taking up and also are there any contingent liability. Also have a look at the balance sheet of the firm as on 31.3.2009 to see what is the position of the assets and liabilities.

If you feel that the stakes are high which you are putting i. e. Rs. 20 lakhs then hire a CA firm and conduct a due diligence of the prop. firm. If you have enough faith in ur friend and u know him from many years then you can also verify the accounts and go ahead.

The profit sharing ratio would depend upon the understanding between both of you. Noboby else would be able to help you on this.

Thanks Aditya

for your suggestion. I am actualy going that way. But I met his CA yesterday. He  wassuggesting an easier model. He said why go for valuation in detail..Instead go for a simple formula.

He suggested the following

The income from the business is say 25 lcas per year.

I invest say 20 lacs.

We presume rate of return at 12.5%. So on 20 lacs the annual return would be Rs.2.5 lacs.

Which makes it 10% of the total profit. So I get 10% stake.

I found this quite crazy. Hadnt heard anything like this. I declined  and told him to make a proper valuation based over last 3 years including this year upto 31.3.09. Told him to leave out  personal assets like car and land from the said valuation.

Laslty why is his CA suggesting like this. How does it help him or his client.

I will be grateful if you could answer this too.