Purpose of valuation
Are you thinking of selling or giving away your company, making M&A transaction, planning transferring to the next generation or just interested in the value of your company? In all of the mentioned situations valuation – expert’s estimate of the value of the company – is beneficial if the company isn’t a public company.
For valuation purpose it’s essential to understand the reasons for the valuation process and what exactly is the unit that will be bought, redeemed, sold or given away. It needs to be understood, what is the value that’s pursued, in what circumstances and to whom.
In different M&A transactions valuation is the basis for the negotiations between the buyer and the seller and often also tax consequences are reviewed. When property is transferred to the next generation or the question concerns gift or inheritance valuation is primarily used for comparing different alternatives or analysing tax consequences. Valuation is often needed in relation to divorce so that marital assets can be fairly distributed.
What is the value, how is company valuation done?
Value is not a fact, it’s an opinion. It’s an opinion of either the price that would likely be paid if the ownership of the property was exchanged freely or the economic benefit that could be attained from owing the property.
Value should not be confused with the price: price is the amount that has been asked, offered or paid of certain assets. Different valuation methods and assumptions the valuation is based on give different values and it’s essential to know and understand how to calculate and determine the value in different situations. In valuation the starting point is the market value of the company. There isn’t a generally accepted model for calculating the market value. Market value means the price that the buyer would likely be ready to pay for the target.
Economic estimations are based on many discretionary factors. Subjective evaluations of company’s current situation and its development in the future affect company’s value. In the end, the economic value of a company is defined in the market based on supply and demand.
Valuating a company and its assets include special problems because the value of an operating company is not the same as its separately priced parts and because certain commodities have value only in certain processes and sometimes only for certain user. Operational prospects, organizing and knowledge of the business may either add value or losses: this means abstract values like goodwill or badwill.
In a strategic analysis especially company’s main risk factors are taken into account. Analysing financial statements aims at evaluating profitability and financial situation of the company. Analysing future aims at forecasting company’s financial success in the future.
Value of other companies than public companies can’t be evaluated based on a certain model. Especially small and medium companies like family businesses need to be valued company by company taking into account special features of each company.
A straight forward way to evaluate company’s value is to count its net assets i.e. substance value that is based on defining company’s current debt-free assets. Substance value reflects the amount of money that would be left if the business was wound up. When valuation takes into account the current value of company’s future yields, a yield value is received. The assumption here is that the business will be carried on continuously (going concern).
Valuation method and the value that’s considered to be the best estimated value needs to be determined separately in each case.
