Essentially, business valuation is a collaboration of procedures put together to help recognize the economic value of an entity. Whether a business setup needs to be sold, or funding is induced, or even during situations of inheritance, partner exit, etc, determining the economic worth of the entity is imperative. As simple as it may sound, unfortunately, mistakes are made right at this elementary stage of conceiving the meaning. The economic value of a company and the price of the company hold different meanings and should not be confused with one another. The company price ties to the amount that was realized from the sale of the entity, as per prevailing demand and supply rates. The value of a company on the contrary boils down to the maximum amount a potential investor is willing to spend towards investing in the company. An investor may easily be lured to acquire a company if it instigates his interest. For example, it may be of utmost interest for an investor to serve the local community, and a company that passionately engages in such activities might be highly valued by such an investor. He hence may be delighted to bid the highest price in a company since it fulfills his objective of serving the community. Whereas, some investors will find value in investing in a company with a history of incremental profits. Business value has varied perceptions among different people. The complexity surfaces once there is a need to enumerate maximum values generated from the key business areas. This requires precision in finance and accounting, handling technicalities, and most importantly understanding the business model clearly, identifying its value-generating aspects, layout strategies, and market research. Without the foresight and intuition of an expert valuator, it may be hard to extract the highest value from a business entity.
Most valuation techniques that exist can be broadly categorized under 3 basic approaches. Based on the assessment objective, any or a mix of these approaches can be used.
The major takeaway is that pinning down a fair business valuation may be tricky, yet it’s central for negotiating deals. It's ideal to seek assistance from professionals who recognizes the nature of business and help decide the best-suited valuation method/s to adopt to avail the maximum value that may be quoted to a potential investor or buyer. Although the price may instantly not be agreed upon, it at least connects the two parties through a common ground. It’s essential that the historical financial data disclosed for valuation is authentic, accurate, and comprehensible, based on which the business value approximation can be arrived at. A brilliant idea is to test all the approaches and determine business value from all perspectives. Then the average can be noted as fair business value be used for safe trading. On a finishing note, it’s good to note that, no amount of multipliers, math, or market research would be enough if not coupled with the right instincts.
