A Valuation is the process of evaluating the net worth of a business enterprise or equity interest in a company. In very simple words, valuation is all about putting a price tag on a company. In addition to providing a baseline for the establishment of the price of a business, valuation also serves as a potential management tool that helps an entrepreneur to determine the character, strengths, weaknesses and potential of a business. Once, the business owner gets the report card of his business, all he has to do is to workout strategies to increase his company’s value and draw in more capital.
Today, entrepreneurs function in an ultra-competitive environment, where mergers, acquisitions, strategic partnerships, joint ventures, etc. have become a norm. However, it is usually difficult for owners of private companies to find an appropriate buyer or partner because unlike the public companies, there are no stock exchanges that can function as a value meter for the former. In such cases, valuation emerges as the most strategic method to get the best possible deal.
It is said that calamity typically strikes without warning. Hence, it is essential to know the true value of a business, so that the family of the business owner can efficiently deal with the third parties like governmental authorities, shareholders, business partners, etc. Moreover, valuation is one of the most important tools to deal with demanding and complicated issues as estate planning, employee stocks ownership plans, corporate divorce and marital disputes.
No doubt a valuation is essential from the perspective from any business owner, but the key issue is how to conduct a valuation. The comprehensive valuation process can be divided into four phases viz. assessment phase, data gathering phase, analysis phase and estimation and report generation phase. As the entire process is too intricate to handle alone, and moreover, the business owner will normally perform a biased valuation. Hence, it is worthwhile to engage a professional valuator to conduct the process.
The valuator initiates the valuation process with the assessment phase where he determines the scope of the project, appropriateness of the client, and what valuation entails. Often, the valuator uses assessment form to know more about the project he is about to undertake and the people with whom he would be working in the coming months. In very specific terms, a valuator tries to ascertain the following facts through the assessment form:
- Is there any conflict of interests?
- Is the client capable of paying the fees?
- Does the valuator have sufficient expertise to handle the project?
- Is the capacity of the staff appropriate for the project?
- Will the project violate the ethics and standards outlined by the valuator’s professional association?
Once, the valuator gets a feasible answer to all these questions, he kick-starts the second phase of valuation, that is, the data-gathering phase. In this phase, the valuator tries to delve out as much information about the company as possible. He requests the company owners to provide him financial statements, balance sheets, operating budgets, contingent liabilities, legal documents, accounting documents, business plans and projections. Apart from these, the valuator also collects the competitor’s financial data, and reports on economic, regional and local trends.
In the analysis phase, as the name suggests, the valuator thoroughly analyses all the data that he has gathered. The last phase is the estimation and report generation phase during which the valuator tries to project the value of the business on the basis of the work that he conducted in the data gathering and the analysis phase. Finally, he either presents a written report or an oral report. As all the future business planning will depend upon the valuator’s report, therefore before hiring a valuator it is essential to confirm his education, training and experience, and get his testimonials verified by an attorney.
The valuation process is a costly proposition. The most pertinent question that arises at this point is, “Is valuation process worth it?” Yes, valuation is absolutely necessary because it reveals the true worth of the management. If the result of the valuation is not as it was expected, then the business owner should take appropriate steps to enhance the value of his business. However, if the result of the valuation is as it was anticipated, then it is perhaps the most opportune time to sell the company. In nutshell, valuation provides business owners the ability to run their company successfully.