Company Valuation is a very important element business purchases of any kind. Conducting a formal valuation of the seller’s business is a vital component of the buyer’s analysis when discussing a proposed acquisition. The valuation of a business in the context of an acquisition, as opposed to estate planning or other purposes, often involves consideration of “investment” or “strategic” value beyond a street analysis of fair market value. Valuation may be done by the seller prior to entertaining prospective buyers, by the buyer who identifies a specific target or by both parties during negotiations to resolve a dispute over price.
There are a number of different elements to the science of company valuation and valuation issues can have a large impact on the terms and pricing of a transaction. There are numerous acceptable valuation methods and, in most situations, each will yield a different result. In fact, the formal mathematical valuation should only play one part in the overall pricing of the deal and in determining the transaction’s true value to the parties. While all methods should, in theory, yield the same result, they rarely do, because of factors including, but not limited to, market conditions, the industry in which the target company operates and the type and nature of the business.
All three main methods of valuation are open to debate and differences of opinion. The methods are useful in that they provide starting points and supply a range of reasonable values backed by various valid manners of justification. Even so, the value or price of a company is dependent on the particular time of the valuation and on the true motivations and goals of the key players involved in the transaction. Fair market value is commonly defined as the amount at which property would change hands between a willing seller and a willing buyer when neither is under compulsion and both have reasonable knowledge of the relevant facts.