Why Do You Need a Business Valuation?

Business valuation is the process of estimating the economic value of a business or its ownership interest which involves taking into account its financial performance, assets, liabilities, and other relevant factors.

An accurate business valuation can help business owners and investors make strategic decisions about growth, financing, and exit strategies.

Companies seek clarity about fair value for a variety of reasons. Whatever the motivation, we believe valuations are fundamentally a process for informing the decisions you make with what is likely your most significant financial asset.

12751-Blog-DecisionMaking-1-Time-v1c-blog-1-1024x576 Why Do You Need a Business Valuation?

This is an important question for most owners of a closed-held business. Value of a closed-held business is not easily determined as there are numerous factors that can impact a business’ value. Each business is unique, and no public market exists for the shares of the business. Valuation is not an exact science whereby a given formula can be applied to a set of data and conclusive results determined. The informed judgment of the professional must be inherent in the valuation process. A systematic, professionally prepared business valuation report can provide objective guidance in answering these critical questions.

The value of a closely held security is commonly considered its fair market value. “Fair market value” has been defined as the cash (or cash-equivalent) price at which the security would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.

There are several reasons why it is important to have a business valuation:
• Mergers & Acquisitions / Joint Venture
• Reverse Takeover
• Purchase Price Allocation (IFRS3)
• Fund Raising and Financing
• Financial Reporting (IFRS)
• Initial Public Offering (IPO)
• Restructuring and Reorganization
• Internal Assessment
• Corporate Planning
• Second Opinion

The purpose for the valuation affects the value conclusions by its characterization of the willing buyer and seller in this common definition. The characterization of the willing buyer and seller is important because different buyers and sellers assign different values to a business and its securities. A “real world” buyer would assign a higher value to a business or its securities if that business were a good fit with the buyer’s current business. In this way, the “best fit” buyer both increases the benefits and reduces the risk of the business investment opportunity.

On the other hand, a buyer who had no similar business, did not want to manage the business purchased, and was concerned about the lack of liquidity in owning a closely held security would pay far less for the same business or its securities. This buyer would pay less because the risks are so much greater than they are to the “best fit” buyer.