Business valuation is the process of measuring the economic value of a business or a company’s unit. This exercise is carried out to determine the fair value of a business for various reasons such as calculating the sale value, establishing partner ownership, or for taxation. Professional business evaluators must be hired as estimating the value objectively is
Business valuation is the process of measuring the economic value of a business or a company’s unit. This exercise is carried out to determine the fair value of a business for various reasons such as calculating the sale value, establishing partner ownership, or for taxation.
Professional business evaluators must be hired as estimating the value objectively is an intricate process and requires financial expertise.
Business valuation can be used for the following purposes:
- Litigation issues – Valuation disputes usually arise at the time of dissolution or on the date of a sale or exit of an investor from the firm. If a valuation has been performed accurately, it serves as strong evidence of the company’s credibility. Generally, the services of an expert forensic accountant are secured to ensure the valuation can withstand adversarial legal proceedings.
- Intellectual property – Assessing the value of a patent, trademark, or copyright is critical for all businesses, in particular startups. Business valuation aids in measuring the value of this intangible asset. It is, after all, a key reason for mergers and acquisitions, and having it correctly valued is of utmost importance.
- Debt raising – Business valuation is required for debt raising. It helps financing companies understand the potential of the business as well as its ability to pay back from the residual equity value, if necessary. Financiers will look for these valuations to determine the benefits likely to accrue to them by investing in a company through hybrid securities such as convertible bonds.
- Share issuance – Business valuation assists in valuing the stock of a company. It enables stockholders to understand the value of their stock. Moreover, it is an important insight to have if a business is going to be sold.
- Business reasons – Business valuation is needed for many business activities, including business reorganization, resolution of shareholder disputes, employee stock or share option plans, mergers and acquisitions, and expropriations.
The three main methods to execute business valuation are:
- Asset-based approach
- Income-based approach
- Market-based approach
The valuation method used depends on the requirement of the company, overall economic conditions, and changing demand for the business’s products or services. This exercise should be carried out periodically to assess the company’s growth.
Business valuation is a critical financial analysis that should be performed by a valuation expert to determine the correct value of an entity. The company must seek a certified professional who has adequate and relevant professional experience.