About Business Valuation

About Business Valuation

A business valuation is a professional, unbiased and qualified opinion of the value of a company. It is an inexact science that requires a certain amount of qualified speculation. Just as it sounds, is the purpose to determine the value of the business at the event of transfer of ownership. A majority of our cases are used to taking in or buying out a business partner. This makes it easy for us to follow up on our own valuations for quality control. The transactions that are diverting from our valuation are usually due to a diversion from the fair market value principle or internal transactions of family owned businesses.

The most common reasons for our business valuations are:

  • Buying out your business partner
  • Taking in a new business partner
  • Purchasing a company
  • Selling a company
  • Litigation
  • Arbitration
  • Generational transaction in family owned businesses
  • When applying for a loan
  • For the sake of curiosity
  • Exit planning, when intending to increase the valuation

We are occasionally hired for other reasons than the above mentioned.

The job of a business valuator

All businesses are indeed worth what someone is willing to pay for them. Counterintuitively, that concept has no applicablity in practice. Let´s assume that business owner John Doe is considering selling his business and gets an unbiased business valuation. Business buyer Jane Doe comes forward and makes an offer below the business valuation. This does not instantly make the business worth less. However, if Jane Doe would submit an offer above the business valuation, it would allegedly only be worth that once the transaction closes. This means that higher offers does not change the value of the business by themselves. When in court, or even disputes outside of court, it is common with claims that someone is willing to pay a certain amount for the business. This does not matter, until said buyer moves forward and closes the deal.

The value of the business can only “be moved” in one direction by a real world buyer that ends up transacting. This is why independent and unbiased business valuators are needed. Business brokers can typically not be considered as unbiased because they typically only represent the seller and have a biased interest to collect an engagement fee. The job of a properly independent and unbiased business valuator is to act and think like the buyer that is the most likely to eventually transact with the seller.

An unregulated industry with questionable reputation

None of the major English speaking countries have a license for business appraisers. Be aware of any ambiguous statements claiming so. Impersonating a licensed profession that doesn’t exist is misleading. However, in the US, there are non-mandatory membership societies. Some are in favor of them, and some have lesser opinions of them.

We consider the industry of business valuation to have a development potential, when it comes to reputation, primarily due to the extent of how too many business valuations are done without on site inspections, interviews nor have an anti corruption policy. Such valuations are too easily manipulated, or can be misleading, or can face scenarios with biased leverage over the valuation.

Business valuation is the process of determining the most likely value of the business, in a transaction, where both parties are equally motivated to transact. A qualified valuation of a business should be according to the concept of intrinsic value and include an unbiased normalization of the financial statements. The final calculation of a business appraisal is fairly simple and quick, which is typically what you only get, when ordering an online valuation, without an on-site visit. The process of normalizing the financial statements along with weighing in the different valuation methods against each other, is what requires the most amount of time and competence, by the business valuator. The normalization of the financial statements is typically what affects the valuation the most. A company valuation should only be considered as reliable when it is properly independent and unbiased.

The most common methods for valuing a company are; the market approach, the income approach and the asset approach. They all have their strengths and weaknesses, and their own subcategories. No valuation method is complete enough, to solely be used to value a company.

The market approach doesn’t properly weigh in the profitability or assets of the company, which arguably are the most central aspects when valuing a business. Therefore, most valuations according to the market approach, are not of intrinsic value.

The income approach doesn’t take the assets that the company owns, into account. Therefore, companies with lots of assets get deceptive valuations.

The asset approach doesn’t take the profitability into account. Therefore, profitable businesses get deceptive valuations.

Want to go with a cheaper option or even do the valuation yourself?
Nothing is stopping you, but...

You may lose the lawsuit, due to the valuation failing to be waterproof.

You may never settle the conflict, hurting the relationship with your counterpart.

You may get deceived while entering or exiting your partnership.

The contact form is out of service, please email christoffer@nielsenvaluationgroup.com