Company valuation is one of the most important factor in deciding whether or not to close a merger or divestiture. The valuation is determined by looking at the company’s performance, including market performance and financials.
What is a company valuation?
Company valuations are what you use to determine the value of a company based on its operational performance. Done correctly, a company’s value is the highest price that a willing buyer would pay for it and that, in turn, would be accepted by a willing seller. In other words, you can’t have one party paying significantly more than market value and another significantly less. Both parties have to agree on the price or else the deal won’t close.
In some cases, this valuation will also include what’s referred to as “enterprise value”, which includes all assets and liabilities of the company (basically everything that your business owns and owes).
There are two types of company valuations: the “Arm’s Length” valuation and the “Going-Private” valuation.
What is an “Arm’s Length” Valuation?
An “Arm’s Length” valuation is a company valuation done between two unrelated parties, one being a buyer and the other being a seller. In general, this type of valuation is appropriate when there’s great deal of interest in either party, or when both parties want to move very quickly on closing the deal. Good examples of this would be when you’re selling to another company for merger or acquisition purposes, or when you’re buying out another company in order to take it private.
An “Arm’s Length” valuation is a company valuation for between two unrelated parties, one being a buyer and the other being a seller. In general, this type of valuation is appropriate when there’s great deal of interest in either party, or when both parties want to move very quickly on closing the deal. Good examples of this would be when selling to another company for merger or acquisition purposes, or when buying out another company in order to take it private.
What is a Going-Private Valuation?
A “Going-Private” valuation is between two underwriter firms (investment banks that assist in mergers and acquisitions). Good examples of this would be when selling to another company for merger or acquisition purposes, or when buying out another company in order to go private. Most of the time, these companies are highly leveraged at the time of closing, so this type of valuation could mean that the business will have very high debt requirements.
Why is company valuation important?
Business owners spend considerable time and energy trying to improve the value of their company through concerted efforts and deliberate growth plans. It is however difficult to draw up growth plans and position a business effectively for growth without knowing where to begin.
Not only do business owners need to understand the value of their business, they also need an understanding of the key drivers of growth for their business. A valuation often serves as a reality check for owners with a biased or uninformed viewpoint on what their business is worth.
How is proper valuation carried out?
Get professional help. It is important that business owners get help from qualified financial advisors given the important nature of valuation to parties that may be interested in valuing a business. The costs of getting the valuation right by hiring an expert is meagre compared to the potential consequences of getting it wrong when one chooses to conduct such valuation unprofessionally. Certified Valuation Analyst (CVA) are available to assist in this endeavour and can also provide support when it comes to negotiating with potential buyers.
