Business Valuation
Business valuation is the process of determining the economic value of a business or company. It involves assessing various factors such as assets, liabilities, cash flow, and market conditions to arrive at a fair and accurate valuation. This is often done for purposes such as mergers and acquisitions, financial reporting, taxation, and investment analysis.
7 Key excerpts on "Business Valuation"
eBook - ePub- Lisa Holton, Jim Bates(Authors)
- 2009(Publication Date)
- For Dummies(Publisher)
...Valuation is a process that forces you to look at the viability of an existing business or a business idea and at whether an investment in a particular business will outweigh investment in other things like the stock market, currencies, or other securities. It’s tough to avoid emotion when buying or selling a business, but valuation is a reality check. The mother of all standards: Fair market value The standard of value you hear about most often is fair market value. Fair market value — a term used colloquially with market value and cash value — describes a Business Valuation in which a buyer and seller, who are both willing participants in the transaction, can agree on a transaction based on a common knowledge of all relevant facts. The word market doesn’t imply the stock market; it’s basically the market of all buyers and sellers that would potentially be interested in making a particular deal. Why do we emphasize that the buyer and seller are both “willing participants” in the transaction? Because someone having an urgent reason to buy or sell can definitely skew the valuation in one of two ways: Motivated buyers tend to pay higher prices to unmotivated sellers. Motivated sellers tend to accept lower prices from unmotivated buyers. The valuation process would be so much easier to explain if there were only one or two motivations for a transaction. And of course, valuing businesses would be even easier if both people and businesses weren’t so unique. But the value of any business may get personal, based on the individuals involved. One buyer may have a personal vision of what the business is worth, and of course, a valuation professional may disagree after he or she views conditions from specific data combined with training and perspective. All these viewpoints — and the desire to possess or give up a business — have a somewhat unpredictable up or down effect on price...
eBook - ePubBusiness Valuation
Theory and Practice
- Marco Fazzini(Author)
- 2018(Publication Date)
- Palgrave Macmillan(Publisher)
...The external variables look at the environment in which the company conducts its business and include, for example, market features, the company’s competitive positioning, distribution channels, or consumers’ tastes. In short, it is necessary to develop a comprehensive opinion that encompasses in one single model both the theoretical business value and the value that considers the environment where that business develops and performs its activity. This is why the method presented in this volume is called integrated valuation approach (IVA). According to this approach, the evaluation process does not end with the application of a model, but requires considering the business as a whole. 1.2 The Business Valuation Valuing a business is a complex exercise for various reasons. First of all, the characteristics of the business change quickly. Over time, changes may occur that affect the value of the business, for example, a reduction in profit, higher investments, new debts, different revenues. Value, therefore, is neither constant nor immutable, but must refer to a specific date and situation. A valuer is like a photographer who has to take a picture of a moving object. To obtain a clear image he or she needs the right camera and the right setup and must have enough experience for this type of shot. Likewise, valuers must be able both to choose the model that better interprets the value and to apply it correctly. Secondly, the value of a firm can be seen from different perspectives. As we will see further on, we can use methods that are based on expected cash flows (income methods, see Chap. 4), market values (market methods, see Chap. 5), and reproduction/replacement cost (cost method, see Chap. 6). Each of them considers some specific aspects of the firm and can lead to partially different results...
eBook - ePubMeasuring Business Interruption Losses and Other Commercial Damages
An Economic Approach
- Patrick A. Gaughan(Author)
- 2020(Publication Date)
- Wiley(Publisher)
...The expert then selects the appropriate techniques to be used to value the business. These are shown in the middle of the chart. By employing these methods, the expert is able to arrive at a value for the equity of the business. This equity value may then be subject to certain adjustments such as those shown at the bottom of Exhibit 8.1. The remaining part of this chapter takes the reader through the steps in the valuation process. Theoretical Value of a Business The value of a business should be a function of the future benefits that will accrue to the owners of the business. For publicly held businesses, these benefits may come from future dividends and increases in the price of the stock. For closely held businesses, these benefits can be derived in different ways from publicly held firms. Whichever the case, the valuation exercise involves defining the benefits and projecting them into the future. The higher the value of such benefits, the greater the value of the business. The identification and analysis of such benefits is the subject of the valuation process. EXHIBIT 8.1 Pathway to valuation. Source: Robert Trout, “Business Valuations,” in Measuring Commercial Damages (New York: John Wiley & Sons, 2000), p. 237. This material is used by permission of John Wiley & Sons, Inc. Methods of Business Valuation In a Business Valuation, an analyst assigns a value to a financial asset for which there is often either no market or only a limited one available to value it. Businesses whose equity or debt securities are actively traded on securities exchanges are regularly valued on a daily basis. Such companies are known as publicly held companies based on the “public” ownership of their equity. For bigger companies, the ownership is usually held by a large number of stockholders...
eBook - ePubNavigating the Business Loan
Guidelines for Financiers, Small-Business Owners, and Entrepreneurs
- Morton Glantz(Author)
- 2014(Publication Date)
- Academic Press(Publisher)
...Fortunately, there are numerous corporate valuation books, models, and instructional guides available. Of the books and methodologies available, McKinsey and Co.’s book Valuation and McKinsey’s CD-ROM package stand out, having been hailed by financial professionals worldwide as the single best valuation guide of its kind. In this chapter, we will explore the basis of Business Valuation and introduce a detailed small-business appraisal template. With all the talk about economic recovery and government efforts to unfreeze credit, economists warn that we are only about halfway through this credit crisis. This is not good for small businesses that struggle to acquire funding. Available credit to small businesses and consumers has tapered down by trillions of dollars since the recession. Small-business loans are hard to find, and credit card facilities, a major funding source to small businesses, have been cut considerably since 2013. This means you must stay ahead of the game. When the economy finally peaks and lenders start looking for friends, you will stay at the head of the line by understanding your business inside and out. If you have a good creditworthy business deserving of low loan rates, prove it! While valuation appraisals help determine creditworthiness, they serve other purposes as well: lending, equity financing, acquisitions, divestitures, and restructurings. Valuation appraisals establish a reasonable asking or offering price. Business units are valued as stand-alone entities and are then valued as if combined using anticipated synergies from acquisitions and restructurings. Valuation appraisals help entrepreneurs and dealmakers determine financing and fair market prices. Partnership/shareholder agreements and buy–sell agreements should be based on appraisals. Valuations are finalized when shareholders buy into or exit businesses. Employee stock ownership plans (ESOPs) transfer a portion or all of the ownership of a business to employees...
eBook - ePubThe Art of Business Valuation
Accurately Valuing a Small Business
- Gregory R. Caruso(Author)
- 2020(Publication Date)
- Wiley(Publisher)
...CHAPTER 14 How to Review a Business Valuation I would rather be approximately right rather than perfectly wrong. Does this make sense? Namely, when looking at a Business Valuation, a sense of curiosity is the starting point of the Art of Business Valuation. A surprising number of times when carefully reviewing valuation reports, the answer to the question is no. This does not make sense. Sometimes the value determined seems reasonable but the supporting facts and assumptions do not really add up. Other times the value calculated is just wrong. Most of us have read too many reports that seem quite “pretty” and thorough (or at least long) to find upon closer review that they are wanting in their logic, have unsound or incorrectly applied methodology, meaningless subjective weightings, unfounded or unexplained assumptions, and calculations that couldn't be replicated or just don't matter. Clearly there are multiple levels and reasons to review a Business Valuation. The steps presented here can be used for internal pre-release checking of the valuation. They can also be used to review other valuators' valuations. Humans (including analysts) can be swayed and begin to take sides and not even notice they are doing it. Another factor that plays into poor valuation estimates is lack of expertise. Combine a work product that requires many assumptions, multiple methodologies, and a huge variation of types of businesses and size ranges of businesses and it is easy to miss the mark and never even know it. Mergers & Acquisitions professionals see this all the time with valuations prepared for exit planning purposes. For example, the well-meaning analyst who used large public company guideline comparables for a small engineering firm and then put a control premium on top. Nice theories but the wrong result. (You can't make this stuff up...
eBook - ePub- Hans Lind, Bo Nordlund(Authors)
- 2021(Publication Date)
- Wiley(Publisher)
...3 Finding the Market Value: What Is a Valuation Method and How Should the Methods Be Categorized? 3.1 Introduction and Overview The chapter starts with a discussion of the three classic valuation methods or approaches: market or sales comparison method, income method and cost method. They are only discussed from the perspective of finding the market value of a property. We compare how they are described in some basic textbooks and in valuation standards, and point out some problems, especially how to draw the line between the sales comparison approach and other approaches. This problem is described more in detail in Section 3.3, and it points to the need for a more fundamental discussion about what can be called the information base of valuation (Section 3.4). In Section 3.5, the result from these discussions is used to sketch an alternative classification based on how the link to the market is accomplished. Three basic approaches are presented: A sales comparison approach, an actor‐based approach – where the link to the market is through knowledge of how actors in the market think and reason – and an approach where the valuer uses information from the stock market. Independently of which approach/method is used, there will always be a need to make adjustment to take into account special characteristics of the property to be valued. Different methods to make such adjustments are discussed in Section 3.6. Sections 3.7 – 3.9 cover some more specific issues: the first is why statistical regression analysis of price data has not replaced the standard valuation methods (3.7), how a cash‐flow analysis really can lead to a market value (3.8), valuation of development properties (3.9) and the use of several methods to estimate a market value (3.10). French and Gabrielli (2018) make a distinction between approaches, methods and models. The three traditional approaches are mentioned (income, cost and market), but there is no explicit definition of an approach...
eBook - ePubConcise Guide to Value Investing
How to Buy Wonderful Companies at a Fair Price
- Brian McNiven(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...Chapter 6 Stock valuation Assets can be divided broadly into tangible and intangible. Tangible assets are essentially everything that is physically visible. Intangible assets, although lacking a physical presence, are valued in accordance with their deemed ability to produce income. Patent rights, copyright and ‘know-how’, or intellectual property, are intangible assets. Although one can reasonably determine the value of tangible assets by shopping around for comparables, the value of intangible assets is a lot more subjective. When assets are used to produce income, a different class of asset arises that we refer to as a business, the value of which is determined not by reference to the realisable prices of the assets it employs, but by its earning capacity. The more net revenue a business produces from a given value of assets, the more valuable the business. As we have seen in the previous chapter, in a good business, $1 of net assets (book value) might give rise to $3 of business value. The $2 of excess value over book value is referred to as economic goodwill. Conversely, in a business with low profitability, $1 of book value might only translate to $0.50 or less of business value. When a business has proven over time that it is unable to generate sufficient income to justify the book value of its assets, either its assets are overvalued in the accounts, or the business is not economically viable as a ‘going concern’. Such businesses, and there are a lot more of them than you might suspect, are said to have negative economic goodwill, meaning that the business is worth less than its book value. Companies with a history of poor-to-modest business performance are best avoided at any price. Is a business worth the sum of its future cash flows? Someone once proclaimed and others now repeat the nonsense that a business is worth the sum of its future annual cash flows over the life of the business discounted by an appropriate interest rate...
