A company valuation is a process of assessing the economic value of a whole company or part of a company. It can require complex research, data analysis, and mathematical equations.
A company may perform or order a valuation to prepare for the sale of a company or its assets, the merger of two companies, or the acquisition of a company as an investment—for many other reasons.
The methods used for valuing a company can vary according to circumstances and goals. For example, when a company is being evaluated so its assets can be sold quickly, its value will be calculated differently than that of a company that is preparing to merge with another company and share ownership of equity.
Because of the many decisions involved in the valuation of a company, many businesses outsource the task to an expert advisory firm. Such providers may have performed company valuations many times as part of their corporate advisory services.
Common Reasons for Ordering a Company Valuation
What is a company valuation used for? Seven possible situations that make valuations necessary are listed below, although there are many others.
An Opportunity to Sell a Company
At times, the timeframe in which you can sell a company is brief. If you order company valuations on a regular schedule, you’ll be able to take advantage of good opportunities quickly.
If your company is going to spin-off a part of itself, it’s vital to have an accurate assessment of the value of that piece of the corporation in order to estimate the fair compensation your company deserves for it.
A Business Expansion
When preparing for an expansion of your company, you may be approaching investors or banks for financing. Having a recent, professional company valuation can convince them to finance your materials and/or structures quickly.
Evaluating a Possible Acquisition
The accurate valuation of a company as an investment can make the difference between a profitable investment and a loss. It can predict the future cash flow of a company and convert that to a current value.
During the merger of two companies that are of about equal value, the companies can struggle to agree on the relative value of each. An independent valuation of both firms allows them to begin the process of dividing their equity fairly.
A Separation from Shareholders or Partners
The departure of shareholders or partners can happen suddenly, and it can be difficult to calculate a fair share to give them. An accurate company valuation makes the process much simpler.
The Benefits of an Expert Company Valuation
It’s possible for businesses to perform their own company valuations without extensive experience. However, the results can often be less reliable than those that a professional service firm can provide.
What is a company valuation expert able to do better? Specialized firms keep up with the latest software, methods, and laws related to company valuations. In addition, the fact of having an objective outside report can protect your company from certain types of scrutiny and charges of unfairness.
Very proactive business professionals order company valuations of their own businesses on a regular schedule. You can better prepare your firm for a variety of situations by adopting this practice.