The information contained in this article should enable you to form an opinion of the current value of your business. If you have produced realistic profit projections for your business, you should also be able to estimate the future value of your business. This will help you to place your exit planning in a realistic context as well as clarifying your decisions as to when to start planning and how long you need to execute your plan.

Where you are going to estimate the value of your business yourself we recommend that you take the following steps:

1 Gather together all the relevant financial information, including historical accounts, profit forecasts and asset values.

2 Value your business using two different methods. You should compare the valuations and, perhaps, average them.

3 If your business is very small, you should compare the valuations with the relevant industry yardstick or standard formula, if one exists.

4 You should compare your valuations with recent market sales of comparable businesses, if available.

Note: You should be aware that your valuation estimation (and comparable market sales) might not strictly apply to your business because of potential risks associated with it or, put more precisely, because of the risk that profits will not be maintained. Also, your business’s real value could, in practice, be less than its theoretical value (arrived at using conventional methods) because of its barriers to exit or impediments to sale. We would hope that you will, in time, remove these barriers, but when you undertake your initial valuation estimates, these problems could still be present and you will have to bear them in mind.

In very small businesses, short-cut methods of valuation are common. These are often referred to as ‘industry yardsticks’, ‘standard formulae’ or ‘industry short cut’ valuation methods.
These methods usually place a value on a business or firm based on its annual gross sales (or turnover), or gross profits, rather than on accounting net profit or the net present value of cash flows. In some industries a valuation will be based on even more basic data such as weekly sales, or even the number of tables in a restaurant!
These short cut methods are not as haphazard as they may at first appear and can be viewed as merely a different way of expressing value in relationship to real profits, as they are usually used in those businesses where a fairly standard relationship does exist between gross sales, gross profit and net profit. Such businesses include small professional practices or small retail outlets, where total value can be expressed in terms of a multiple of weekly or annual gross sales. For example, some insurance brokers are valued at between one and two times the total annual commissions earned.

The DCF method of valuation differs from those we have discussed in this appendix in that it takes into consideration the present value of money. (An easy way to understand the concept of present value is to recognise that a pound in your pocket today is worth more than the same pound in your pocket next year.) The other main difference is that the DCF method capitalises (or discounts) projected cash flows rather than capitalising past and expected future accounting profits.

Purists in the universities and corporate finance firms claim that the DCF method is the only proper way to arrive at the true value of a business and, strictly speaking, they could be right. The DCF method is used in most public company valuations (and by public companies when assessing the value of their potential acquisitions). Its practical weakness for private business purposes is that it relies on discounting the values of projected (or estimated) future cash flows. All business forecasting is notoriously unreliable, and forecasting for private business is even less certain than for public companies. For this reason alone, we do not recommend that you attempt to place a value on your business using this method

One of the reasons that private companies are valued on a lower P/E than public companies is because the shares in private companies are not easily sold. (It is said that there is ‘a lack of liquidity’ in private company shares.) This lack of liquidity is particularly true of a minority shareholding in a private company. Investors are wary of purchasing minority shareholdings in private companies because minorities have little or no power to influence such things as dividend policy and exit strategy, unless there is a shareholders’ agreement in place that protects their position.

If you are valuing a private company for the purpose of disposal of a minority interest in the company that will remain private, you need to be aware that a substantial discount will usually apply to less than a 51% holding. A pro rata value will usually only apply if you already have a buyer who is prepared to accept a value on this basis (such as may be stipulated in a shareholders’ agreement).

Another study conducted by the University of Kiel (University of Kiel, 1998) on small and medium-sized enterprises (SME) of certain European countries emphasizes on the importance of organizational and behavioural aspects of SMEs in achieving energy effi ciency. Through empirical investigations it concludes that energy efficiency depends to a large extent on the existing company culture and on the engagement of fi rm internal key actors and their interaction within the organization.

Furthermore, the fi ndings underline the paramount importance of external actors to trigger energy-related activity in SMEs and to foster a lasting implementation of effi ciency measures, which points at promising domains for policy intervention. Dasgupta (1999), after analyzing some initiatives of energy effi ciency and environmental improvements in Indian SSIs, is of the opinion that a technocratic top-down approach for energy effi ciency improvement is not comprehensive. Advocating a bottom-up participatory approach, she emphasizes the need to address other nontechnical factors associated with energy effi ciency, such as resource use effi ciency, waste-management, poor work practices, layout, house-keeping, and so forth.

Bala Subrahmanya and Balachandra (2002 and 2003) have analyzed energy consumption and environmental pollution of a few SSI clusters in Karnataka from a managerial perspective. They have identifi ed labour skill levels, owner qualifi cations, and technology levels as the important factors in explaining the energy use and environmental pollution. Further, they advocated the promotion of energy effi ciency in SSIs through a ‘cost cutting’ or ‘profi t maximizing’ strategy. Thus, it appears from a theoretical angle that non-technical factors do play a role in energy effi ciency analysis. We have kept this in mind while developing a hypothetical framework for analyzing the various factors infl uencing energy effi ciency in the two SSI clusters under reference.

Based on the available literature, it appears that the energy and environment related aspects of SSIs in India have not attracted the researchers and policy makers in the past to the desired extent. Although there are a few studies on SSIs regarding ‘grain-mills’, ‘foundries’, ‘brick/tile units’, and so forth, yet it is found that most of these studies and initiatives undertaken to improve energy efficiency or environmental performance in SSIs have predominantly adopted a technocratic approach. Such initiatives lacked a holistic perspective necessary for comprehensively addressing the problem (Dasgupta, 1999). Further, there are not many energy-effi ciencyrelated studies in literature involving non-technical factors in the analysis of energy use.

According to Weber (1997), energy consumption belongs to the realm of technology whereas energy conservation belongs to the realm of society. Since effi ciency improvement is a part of the energy conservation strategy, a whole lot of social factors are relevant in addition to the manufacturing technology in the energy efficiency analysis. Particularly, it is true for studies conducted in clusters of specific industries using more or less similar production technologies. Baranzini and Giovannini (1996) link energy consumption to four major factors such as, technological, economic and financial, institutional, and cultural. They observe that the technical factors based on energy-using equipment and economic and financial factors in terms of income and relative energy prices have attracted much attention in the past. Further, they feel that the institutional factors comprising information campaigns, infrastructure, property rights, and so forth, and cultural factors involving attitudes, behaviours, lifestyles, and so forth, must be understood better in order to attain a signifi cant improvement in the energy efficiency.

The SSI growth in India is characterized, among others, by its concentration in different parts of the country in the form of clusters (Abid Hussain, 1997; UNIDO, 2001). In fact, over 400 modern small industry clusters and 2000 rural and artisan clusters exist in the country. These clusters contribute about 60 per cent of the manufactured national exports and account for a signifi cantly high share in employment generation (SIDO, 2004). The SSI sector, being a vital component of the Indian economy, is also a major consumer of energy input. Even if the energy use at the individual level of SSIs is trivial, the total consumption by their clusters and the sector as a whole is likely to be of a sizeable quantum in view of the large number of SSI units and clusters operating in the country. However, SSIs are found wanting in energy utilization effi ciency and environmental aspects like pollution control (LUS, 1997).
Highly energy-intensive SSIs belonging to steel, paper and pulp, textile, cement, sugar, and so forth, cause both global and local pollution due to their ineffi cient energy use. Studies have shown that SSI fi rms not only produce more waste per unit of output but also, at an aggregate level, account for at least equal if not more pollution than their large-scale counterparts (UNEP, 1998; Visvanathan and Kumar, 2002; Kathuria and Gundimeda, 2002). Analyzing energy effi ciency in the SSI clusters assumes signifi cance as they are under unprecedented pressure to improve their
competitiveness, apart from reducing environmental pollution for their survival and growth in the liberalizing Indian economy. However, it is crucial to note that the level of energy effi ciency in an SSI unit depends not only on the production technology adopted but also on a whole lot of non-technology factors including quality of human resources and entrepreneurship. In this backdrop, the current paper analyzes the various non-technology factors affecting energy effi ciency in two energy intensive SSI clusters located in South India by making use of the empirical data pertaining to them.

The industrial sector has emerged as the major energy-consuming sector in India as well, with a share of about 42 per cent of the total energy consumption (Reddy and Balachandra, 2003). Even though the Indian industrial sector comprises both small- and large-scale enterprises, the former accounts for a lion’s share of the total industrial units. As per the prevailing defi nition in India, an industrial undertaking is called the SSI unit if the original investment in fi xed assets, that is, plant and machinery is up to Rs 10 million (in case of hosiery and hand-tool categories up to Rs 50 million) (DCSSI, 2002). The SSI sector is of strategic importance in the Indian economy in view of its contribution to employment generation, production, GDP, and exports. In 2004–2005, the SSI sector comprised 11.85 million units, employed more than 28 million people and generated Rs 3,990 billion worth of production (MoF, 2005). The export by this sector stood at Rs 860 billion during 2002–2003. The SSI sector has created a diversified and prominent presence in the Indian economy by producing over 7,500 products and accounting for about 7 per cent of GDP, 40 per cent of industrial production and 34 per cent of national exports (MoSSI, 2004).

Energy, environment and sustainable development (SD) are closely interconnected subjects attracting a growing attention in research and policymaking circles of the contemporary world. Energy, the capacity to do work, is the ‘life blood of modern economy’ as every human being uses it in one form or the other each day; with that the use of energy lies at the core of modern industrial society. The environment comprises the biosphere: the thin skin on the earth’s surface on which life exists; the atmosphere: the geosphere and all flora and fauna. SD is ‘a development which meets the needs of the present without compromising the ability of future generations to meet their own needs’ (UNIDO, 1998). The concept of SD involves three important dimensions, such as, environmental, economic, and social. In other words, a development which is environmentally, economically and socially sustainable, is an SD.
There is an interaction among energy, environment, and SD in an economy. As most of the environmental problems are associated with the use of energy and the fact that without it, economic development becomes diffi cult, there is an ‘energy trilemma’ involving energy consumption, economic development, and environmental impact (Khan, 1992). It is very diffi cult to come out of this vicious circle especially for developing countries, with their expanding economic activities causing amplified energy consumption. Demand for energy in a growing economy stems from diverse sectors, such as agriculture, industry, commerce, transport, and domestic needs. Of these major sectors, the industrial sector is the largest energy consumer in most of the developing countries (Ross, 1997). At the global level, the industrial sector is the largest energy consumer accounting for about 32 per cent of the total energy use.

Small scale Industries (SSIs) which often exist in the form of clusters are a vital component of the Indian economy on several counts. Energy being an indispensable input, enhancing its utilization effi ciency not only helps in improving the competitiveness of SSIs through cost reduction but also aids in alleviating the energy linked to environmental pollution. The level of energy effi ciency in an SSI depends not only on the production technology adopted but also on other non-technology factors. This paper analyzes such factors including entrepreneurial and human resource factors, in the context of two energy intensive SSI clusters. The analysis of empirical data from 42 iron foundries and 41 textile dyeing units located in two South Indian states establish the signifi cance of non-technology factors and identifi es the key variables in achieving energy effi ciency.

Multiple regression analysis is used for assessing the signifi cance of four a priori identifi ed factors, such as, Technical Factor (TF), Economic Factor (EF), Human Resource Factor (HRF) and Organizational and Behavioural Factor (OBF), in explaining the variation in energy effi ciency levels within a given cluster. Further, the key variables affecting energy effi ciency are identifi ed using Analysis of Variance (ANOVA [sequential sum of squares method]) models. The resshow that HRF is the most signifi cant factor in explaining the variations in energy effi ciency levels in the selected SSI clusters, with the identifi ed key variables complementing it. The outcome of the study underlines the need to involve non-technology factors in the prevailing technology centred, energy-effi ciency improvement initiatives in the small industry sector for discernible improvements in the long run.