What is Business Valuation?
Paramount to a company merger and acquisition transaction is understanding what the business is worth. The merger and acquisition process provides one of the most complex and challenging aspects of business valuation, particularly for private companies. For a potential business buyer or seller, it is very important that he or she obtains a realistic valuation prior to any deal or even starting negotiations for a deal.
Many people ask about a business valuation formula that is universally applicable and can be used to quickly give them a reliable value for their business at any given time. However, no single formula for valuing a business exists; rather there are a set of methods that use different formulas that can be used to value a business.
Business Valuation is the process of determining the economic value of a company, including a company division or a foreign subsidiary as a separate unit. Although the fair market value of a business is ultimately set by the supply and demand, the business valuation process has many real-life consequences and must be undertaken with both good faith and diligence.
To have a credible business valuation it must be performed by a certified professional. The certifications most commonly recognized in the United States include Accredited Senior Appraiser (ASA), Accredited in Business Valuation (ABV), Certified Business Appraiser (CBA), Certified Valuation Analyst (CVA) and Chartered Financial Analyst (CFA).
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Business valuation is a set of procedures designed to determine what is the fair value of a business. In order to conduct a business valuation, a finance professional must first determine the standard of value and the premise of value.
One of those standards is fair market value which is often used by investment funds such as hedge funds and private equity funds to value illiquid investments. It assumes a hypothetical transaction between a willing buyer and a willing seller which both have the same knowledge of the facts.
Its real-life consequences are that it is used as an input in calculating a net asset value (NAV) of an investment fund and therefore determines the dollar amount of fees an investor would pay to the manager. Premise of value is the set of assumptions one must make in order to value a business. The most important and commonly used premise is going concern.
The premise assumes that the business valued is as an ongoing business enterprise that has enough liquidity and capital resources to continue operations for at least the following 12 months.
All the valuation standards above are acceptable and widely used. Business valuations rely on different assumptions that can significantly impact the result. In order to get the most accurate outcome, the valuation professional must determine which set off assumptions best fits the situation described by the client and apply accordingly.
Even with the most accurate assumptions, business valuations can be subjective based on who and for what reason is preparing the valuation. Despite that, business valuations have real-life repercussions that can affect one’s taxes, investment decisions, fees paid to investment managers, and court settlements including divorce settlements and shareholder disputes.
In order to avoid being affected adversely by an unprofessionally conducted or biased business valuation, hire only certified professionals. We can assist our clients in retaining a certified valuation professional. Contact us today!
Malescu Law P.A. – Business & Corporate Lawyers