Most business owners only seek a company valuation to meet an immediate need: when they want to sell or when one of the shareholders wants to exit the business. But a professional business valuation can be very useful even if there is no sale of shares or shares, because it provides its owners with indications of the current value of the company, determined by factors such as: market competition, strengths compared to competitors, future opportunities, the value of assets or the value of benefits expected to be recorded in the future.
What is a business valuation and who can do it?
Valuation is defined in the Property Valuation Standards as a process of estimating the value of an asset or liability.
The value of an enterprise, a business, is the total value of equity plus the value of interest-bearing loans or debts, minus any cash or cash equivalents available to pay those debts.
In Romania, according to the law, the evaluation activity can be carried out by any person who has the status of an authorized evaluator, that is, the person who has acquired this status after completing the stages regulated by law.
The valuation of a company can be carried out by an authorized appraiser who holds the EI specialization: Valuations of enterprises, goodwill and other intangible assets. Valuation missions that also involve the valuation of assets such as land, buildings or technological equipment require the co-optation of authorized appraisers who hold the EPI - Valuations of real estate - and EBM - Valuations of movable assets specializations.
Competence and experience are important aspects to consider when choosing certified appraisers for business valuation. They must be well-versed in both the valuation methodology and the specifics of the company's field of activity.
Some benefits of business valuation
Better knowledge of assets and liabilities in the estate
In annual or semi-annual financial statements, the book value of assets and liabilities may differ from their market value. As a result, the market value of the company's equity may differ from that specified in the balance sheet. Thus, shareholders or associates do not have a clear and true picture of the real value of the business they own.
In a business valuation report, an important chapter can be the revaluation of its assets and liabilities. The current value of the assets is an important indication for a possible decision of the owners to reinvest part of the profit for the acquisition or refurbishment of some assets, and the market value of the debts can influence the decision to refinance or reschedule them. It is also possible that some of the assets held in the patrimony may not be useful for the company's current activity, and their sale may be a better alternative than their continued use. These assets are usually identified following the diagnostic analysis, carried out in the valuation report.
A clear picture of the company's financial situation
The fundamental objective of the owners is to increase the value of the company, which means increasing the wealth of shareholders for unlisted companies and the price of securities for listed companies. It is obvious that such an objective implies a higher profitability, but at the same time ensuring liquidity, solvency, financial balance. All these indicators, which reflect the financial position of the company, are calculated and interpreted by the business valuation professional, within the valuation report. The financial analysis of the company is the preliminary step to applying the valuation methodology, regardless of the chosen approach.
Identifying strengths and weaknesses, opportunities and risks
A well-done valuation helps the business owner understand the strengths, weaknesses, opportunities and risks that can influence the evolution of the business. Once known, these elements give the business owner the opportunity to emphasize the strengths and opportunities, as well as mitigate the weaknesses and threats, well before the business sale process begins, thus creating all the premises to obtain the best price.
A detailed radiography of the business can be carried out as part of the diagnostic analysis, an important stage in the evaluation process. This analysis can extend to the company's legal situation, human resources and management, operational and commercial activity is analyzed, and the financial diagnosis analyzes the company's performance over the last three to five years and identifies potential risks.
A reference regarding the sales price of the business
If the owners of the business are planning to sell it, it is necessary to know its market value. The valuation can be carried out some time before the period in which the sale is desired, thus giving the owners the opportunity to take measures to increase the value of the company in order to obtain a better price. A professional business valuation is essential for identifying the changes that need to be made to make a business more attractive to buyers.
The valuation can also be useful to potential buyers of a business. The result of the valuation represents a fundamental indicator, based on market information, that can be used by the buyer in the process of negotiating the price with the seller of the business.
An important element in mergers and acquisitions
Valuation is an essential element in the procedures leading up to a business combination (mergers and acquisitions). In a first stage of a merger, whether by absorption or by merger, it is necessary to revalue the assets of the companies in question, carried out by appraisers with appropriate professional qualifications. Based on the results of the previously carried out valuation, the value of the assets and liabilities of the companies is adjusted, the merger balance sheets are drawn up and the net asset at the merger is determined. In a third stage of the merger by absorption, the net contribution is determined, through the global valuation of the companies involved. It is therefore important that the team preparing a merger or acquisition also includes authorized appraisers qualified in business valuation.
Listing or delisting the company on the stock exchange
Generally, before a company is listed on the stock exchange, a valuation is carried out in order to estimate the issue value of its shares. The valuation of a listed company may also be carried out at the request of an investor who wishes to submit a takeover bid or may be requested to determine the price at which shares will be repurchased from investors in the event of a delisting.
Resolving disputes between shareholders or associates
When two or more people become partners in a business, they primarily think about how to develop the company and make it profitable, but they do not take into account a possible separation in the future. Misunderstandings or differences of opinion can arise overnight and out of nowhere. In many situations, a business valuation is essential for resolving many problems, including disputes between shareholders, the valuation report being a clear and current picture of the real state of the company. Also, if one of the shareholders wants to exit the business, the other shareholders have the option to buy his shares, at the market value estimated in the valuation report.
A useful indicator in determining an optimal level of indebtedness
The return on investment in a business is also influenced by the level of debt (or financial leverage). Using a certain level of debt in the financial management of the company can increase the return on investment and reduce the risk for the business owner. A valuation can be a useful resource for determining the prudent use of borrowed capital in financing the company's activity.
In conclusion
There are certainly other uses for a company valuation. You have spent many hours, weeks, months, and years building a business in a competitive market. There will be times when your business will shrink and expand. If you are planning to expand your business, knowing your current value is important, both for potential investors and lenders.
Pentru cei care dețin și conduc o afacere de succes, a avea o idee clară asupra valorii acesteia reprezintă un avantaj competitiv și o bună practică. Afacerea este o entitate influențată direct de factorii economici externi, iar cunoașterea valorii afacerii înseamnă înțelegerea locului ocupat de aceasta în piață.
