The result is represented in monetary figures. And the figures can either indicate the value of the entire company or its assets. The true valuation is determined by considering financial statements like balance sheets and/or cash flow statements along with forecasts of predicted earnings, the management in place and the company’s current market value. This is different than the prices of the company’s stock in the stock exchange which is generally determined by supply and demand.
Facebook bought WhatsApp for nearly US$ 21.8 billion to acquire the online messaging company. Similarly, Walmart acquired Flipkart by paying a whopping sum of $16 billion, making it the largest e-commerce transaction. How did Facebook and Walmart decide the actual values of WhatsApp and Flipkart respectively? How did they know whether the sellers are asking a fair price or whether the payment will be worth it in the future? The answers come down to one word – business valuation. And these are part of the entire puzzle as to why business valuation is carried out almost regularly by expert financial analysts.
What is a business valuation?
The method in which the present or intrinsic value of a business is determined is typically known as business valuation. The result is represented in monetary figures. And the figures can either indicate the value of the entire company or its assets. The true valuation is determined by considering financial statements like balance sheets and/or cash flow statements along with forecasts of predicted earnings, the management in place, and the company’s current market value. This is different than the prices of the company’s stock in the stock exchange which is generally determined by supply and demand.
The purpose of business valuations
Understandably, equity investors, and mutual funds managers depend on business valuation results to determine whether a stock is overvalued or undervalued in the stock exchange. This drives their investment decisions and ultimately, profits from the market.
Companies look at the figure at which a business is valued to either merge or partner with another enterprise to expand its business. Firms that are considering sale plan their exit strategies based on the valuations that experts hand over to them.
Angels and venture capitals look at business valuations to again make business decisions. Banks and creditors look at both valuation and balance sheet to extend loans against collaterals. For pitching to any of these funding channels, businesses must show accurate valuation figures to drive interest.
Businesses are taxed (and also provided with aid) depending on their net valuation. Similarly, in case of any legal dispute, it is the actual value that is considered to determine the settlement amount or fine.
In-house equity valuation is called in here to either let go of partners, allocate shares to employees, hand out equity to raise funds, or buy in to control board decisions. Promoters are interested in business valuations and that is the price that they are willing to pay.
Apart from these, companies also carry out business valuations for strategic planning and resource allocation. In short, the accuracy of business valuation is the key to drive results. Only financial executives with adequate training can undertake the endeavor. Valuation is rarely left to amateur hands. The field is coveted, the demand is high. With the right coaching and exposure, anyone can master valuation to the required depths.
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