Overview of Business Valuation Valuation Team

Overview of Business Valuation

07 January 2022 | Published in Business Valuation Methods. Read 2638 times.

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Company Valuation has gained paramount significance in the business process. With the evolution of various business organizations, primarily the company form of business organization, valuation has populated the center phase. Valuation has become pervasive, i.e., whether the valuation is imperative during the beginning of business, growth, merger, acquisitions, winding-up, etc. We will discuss the valuation fundamentals - the main elements of business valuation- Genesis of Valuation, Need for Valuation, Hindrances in Valuation, Business Valuation Approaches, and much more.

INTRODUCTION

Valuation is a process of finding the worth of a particular asset, such as tangible or intangible assets, securities, or liabilities. 'Value' is a term signifying a thing's material or monetary worth, which can be estimated in terms of the medium of exchange. In other words, it is an assessment resulting in an expression of opinion rather than arithmetical exactness. Business valuation requires deep knowledge of the various factors affecting the value and professional judgment and experience.
The various factors affecting the value may include - recognizing the valuation's purpose, the value drivers impacting the subject company, an understanding of the industry, competitive and economic factors, and the selection and application of the appropriate valuation approaches and methods.

Source OF VALUATION

Valuation may be considered a science, but valuation variables require inherent subjectivity to a large extent. In other words, valuation is not a precise science as there is always imperfection in the market. Even in rare instances where the valuer has perfect knowledge of the market, the market does not have an excellent understanding of the value and the valuation methodology and process. On every occasion, there may not be a definitive valuation method or a definitive value determination, but every valuation is based only on its circumstances. Proper valuation requires a logical and systematic approach and careful essential principles, which means there may not be a prescribed format or a preferred methodology to be always embraced.

Today, business valuers need to be better educated to explain better and define business valuation approaches and practices. Therefore, the act of business valuation needs to be more of a science than perception and guess. Enhanced credibility of the valuation process requires setting various estimates of values with the minimum most possible range between the highest and lowest values arrived at through numerous methods. One of the business valuation tools one can adopt to fill the gap is business valuation software, such as equities, which you can try for free. To try for free - click here.

What is our business worth? / What is their company value?
Everyone has an opinion of value about a business, a tangible asset, or an intangible asset, but the term ‘value’ means different things to different people. The issues faced by the valuers are enormous. They have to bring forward a proper definition of value for a detailed valuation. Webster’s dictionary defines value as:

A fair return or equal in goods, services, or money for something exchanged: the monetary worth of something: marketable price; relative worth, utility, or importance: something intrinsically valuable or desirable.

Any business valuation activity is based on the theoretical consideration that there is an arms-length sale between a willing buyer and a willing seller, usually for cash. Any valuation theory attempts to search for truth and relates to understanding valuation theory. Valuation concepts must be understood clearly and be applied too. In the valuation process, one must consider both quantitative and qualitative factors. Establishing the value of specific tangible assets requires special market knowledge, education, and training for the valuer or appraiser. To perform a reasonable valuation, the valuer must get opinions and information from specific exerts such as the construction, efficiency, power consumption, risk of obsolescence, factors affecting future economic use, etc.

THE NEED FOR VALUATION

Valuation of business recreates a critical part. Therefore, a business owner or individual may require understanding a company's value.

A business valuation is a detailed financial study undertaken by a qualified valuation professional with the appropriate credentials or using business valuation software, such as equitest.

The benefits of knowing the value of a business can help business owners negotiate during the sale of their business, minimize the financial risk of a business owner in a litigation matter, minimize the potential tax that he might pay, and provide defense in an audit situation.

Among the vast number of areas in which the valuation is needed, we can mention:

1. Mergers and Acquisitions (M&A): Valuation is an essential element in M&A. It not only helps business owners in determining the value of their business but also enables them to maximize value when viewing a sale, merger, acquisition, strategic partnership, or joint venture.

Both sides in an M&A deal will have different ideas about the value of the negotiated company: the seller will tend to value the company at a higher price, whereas the buyer will try to acquire the company at a minimum price.

2. Succession Planning: succession planning may include a succession to the next generation, succession to employees, or succession to outside parties.

Succession to the Next Generation: Business valuation is needed in planning to transfer a family business to the next generation.

Succession to Outside parties: It comprises mergers, acquisitions, purchase, and sale of businesses.

Succession to Employees: For many closely-held businesses, selling the company to one or several vital employees is often a reasonable succession strategy.

3. Going Public: In general, when a new company goes for an Initial Public Offering (IPO), for raising capital, a question arises as to how to evaluate the fair value of the company's stock.

4. Dispute Resolution: Valuations are an increasingly important aspect of many commercial disputes. Before deciding how to manage a conflict, it is necessary to define the likelihood of a successful outcome and the potential stake involved. Judicial precedents also influence the selection of valuation methodologies and the applicability of discounts/ premiums.

Last modified on Friday, 28 January 2022 05:15