Business valuation is a multifaceted process used to quantify the value of a business based on theoretical models and market reality – taking into consideration historical performance, future expectations, tangible assets, perceived risks, synergies, industry factors and comparable business assets.
Although some items can be determined using mathematical models, others are based on professional opinion. The science component encompasses statistical data, sales of comparable companies and analysis of historical performance. On the other hand, the art component comprises expert opinions, business forecasts, risk assessments and expectations of future returns.
While anyone can learn the science, a seasoned expert stands out for having obtained other key skills required for conducting a quality business valuation.
Valuation for businesses is a difficult and complex process, and valuation for closely-held and private businesses is even more challenging. These complications are generally created by the inconsistency, unavailability or inability to validate information on these businesses; the lack of external reporting requirements and oversight; and the desire to minimize the personal tax burden of owners.
The key valuation drivers are (1) business transactions, (2) taxes, (3) financial reporting, (4) litigation, (5) shareholder transactions and (6) government mandates.
Summary of a Valuation Process
Applying traditional valuation techniques in developing markets is more arduous, as many of the underlying assumptions (such as market efficiency, etc.) may not be applicable.
There is also very little empirical evidence to support valuation conclusions reached for companies in developing countries. Therefore, thorough research is necessary for making adjustments to account for these differences.
Four Final Thoughts
IACVA publications and materials
Best practices for business valuation materials