The life of most medium-sized companies occurs by solving commercial and administrative and related issues. Sometimes, shareholders after years of work and specific circumstances, wonder about if a business valuation of their company could be useful.
Some situations that may require a business valuation of a company are:
Sale, merger or acquisition transaction:
For the buyer, a business valution is an indicator of the maximum value to be paid and for the seller the minimum price to be sold. When a business valuation is required it is good not to confuse value and price. The latter is the amount at which the seller and the buyer agree to carry out a buy-sell operation of a company. In contrast, a company has different value for different buyers and the seller, due to different perceptions about the future of the sector and the company, different strategies, economies of scale and complementarity.
Reorganization among shareholders:
The valuation of different companies related to common corporate groups serves to establish equations for the exchange of shares and to specify exchanges of shares between shareholders.
Inheritances and wills:
The valuation of companies serves to compare the value of shares with that of other assets.
Arbitration proceedings and lawsuits:
A well supported and in-depth business valuation by parties in conflict gives a competitive advantage in processes of this nature.
Initial public offering or new partner entry:
The valuation of the company is an indicator of the price at which the shares could go to the market or the price at which capitalist partners could enter.
Strategic decisions about company continuity: valuation of companies helps a company or its business units, make decisions such as following in the business, selling, merging, growing organically or inorganically, or continuing to obtain cash flow from the operations
Strategic planning:
Business valuation supports decisions about which products / business lines to continue, abandon, empower; Identifies business factors, policies and strategies that create or destroy value.
Mesure performance of shares for listed companies :
The valuation of companies serves in this case to compare the value obtained with the share price in the market and to make decisions on the conformation of investment portfolios and to make comparisons between companies to establish investment strategies.
Compensation systems based on value creation:
The valuation of a company or business units serves to evaluate the value creation attributable to the management that tries to be remunerated.
These are some of the situations that require a business valuation, according to the research document of the IESE Business School and the International Center for Financial Research of the University of Navarra by Professor of Financial Management, Pablo Fernandez (2008 ).
The mentioned research document describes the main methods of valuation of companies and mentions that the conceptually correct and increasingly used methods to value companies with expectations of continuity, are those based on discounted cash flow that consider the company as a cash flow entity and therefore its shares and debt can be valued as financial assets, concluding that the value of the shares of a company, assuming that it will not be liquidated, comes from its capacity to generate money.
Hence our recommendation to managers of companies to focus on maximizing cash flow in a sustainable way in the long term as this will influence the increase of the value of the company.
For more details of the mentioned working paper in this post see Methods of valuation of companies. Author Prof. Pablo Fernandez. IESE. University of Navarra. Research paper DI-771. November 2008.
