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Business Valuation Definition
Business valuation refers to the general process of ascertaining the economic value of a company unit or a whole business. Business valuation can be utilized in ascertaining a business’ fair value for various reasons, with the inclusion of sale value, taxation, divorce proceedings, and establishing partner ownership. Owners would often consult professional business evaluators for an objective estimate of the business’ value.
Important: Estimating a business’ fair value is an art, as well as a science. Several formal models exist which can be utilized, but picking the right one, as well as, the appropriate inputs can be somewhat subjective.
A Little More on What is Business Valuation
The business valuation topic is often discussed in corporate finance. Business valuation is usually carried out when a company wants to sell either a portion or all of its operations, looking to merge with, or seeking to acquire another company. A business’ valuation is the process of ascertaining a business’s current worth, utilizing objective measures, and evaluating every aspect of the business. A business valuation may include an analysis of the company’s management, its future earnings prospects, its capital structure, or its assets’ market value. Ghetto tools utilized for valuation can range from businesses, evaluators, to industries. Common business valuation approaches include discounting cash flow models, financial statement review, and similar company comparisons.
Valuation is pertinent for tax reporting. The Internal Revenue Service (IRS) requests that a business is valued based on its fair market value. Some tax-related events like purchase, sale, or gifting of shares of a company would be taxed depending on valuation.
Reference for “Business Valuation”
Academic research on “Business Valuation”
Emotional returns and emotional costs in privately held family businesses: Advancing traditional business valuation, Astrachan, J. H., & Jaskiewicz, P. (2008). Emotional returns and emotional costs in privately held family businesses: Advancing traditional business valuation. Family Business Review, 21(2), 139-149. This article introduces a formula to assess the total value of privately held family businesses from the owner’s perspective. It is argued that the total value of a business is not only composed of its financial worth and private benefits, as is usually assumed by traditional financial theory, but that emotional components also have an impact on valuation. In particular, it is assumed that emotional returns (ER) positively affect total value, whereas emotional costs (EC) negatively affect total value. Even though every stakeholder faces emotional costs and returns, it is solely the family business owner who ultimately decides on the worth of a business and consequently factors ER-EC into his or her valuation. The presented formula provides a better understanding of investment decisions in family businesses and a more accurate valuation of these businesses.
Fundamentals of functional business valuation, Matschke, M. J., Brösel, G., & Matschke, X. (2010). Fundamentals of functional business valuation. Journal of Business Valuation and Economic Loss Analysis, 5(1). After a brief overview of different company valuation theories, this paper presents the main functions (decision, arbitration, and argument or negotiation function) of company valuation according to the functional (i.e., purpose-oriented) theory. The main body of the paper focuses on the decision function and shows how the decision value can be derived as a subjective limit value that different economic agents assign to the company. Finally, the differences between the functional and the market value oriented theory of company valuation are discussed.
Business valuation model based on the analysis of business value drivers, Kazlauskienė, V., & Christauskas, Č. (2008). Business valuation model based on the analysis of business value drivers. In¿ inerin¿ ekonomika, 2, 23.
Corporate business valuation for mergers and acquisitions, Aluko, B. T., & Amidu, A. R. (2005). Corporate business valuation for mergers and acquisitions. International Journal of Strategic Property Management, 9(3), 173-189. Business combinations including mergers and acquisitions are important features of corporate structural changes. The Investments Securities Acts (ISA), 1999 charge the Securities and Exchange Commission with the responsibility to review and approve all business combinations in Nigeria. And, real property is an integral factor in many of such strategic business decisions and, need to be set in a business context. This paper, therefore, examines how corporate business entities are and could be valued for mergers and acquisitions through exploratory research. It also explains the relevance of goodwill, marriage value, and fair value concept in corporate business asset valuation. The paper found out inter‐ alia that the value of holding property to the business needs to be measured against the return that the equity could achieve both within the business and elsewhere. It also, prima facie, shows that the role of the valuer is not one of accountant but interpreter of financial and physical information with a clear understanding of the nature of the business under consideration in merger and acquisition.
Risk reflection in business valuation methodology, Kazlauskienė, V., & Christauskas, Č. (2007). Risk reflection in business valuation methodology. Inžinerinė ekonomika, (1), 7-15. This article is to investigate relevant and sophisti-cated problem concerned with risk reflection in business valuation methodology. The relevance and sophistication of risk reflection in business valuation methodology is affirmed by the discus-sions of scientists who analyse the problems of business valuation. Description, classification and valuation of risk within context of business valuation have several approaches in scientific literature. Presented classifica-tions of risk are various and include various types of risk and factors determining risk. Considering variety of risk classifications it is sug-gested risk’s classification based on decomposition of systematic (external) and unsystematic (internal) risks to the factors that have influence these kinds of risks. Factors of systematic risk are classified according to factors of macro environment and industry environment. Factors of unsystematic risk are divided into two groups: quantitative and qualitative factors. Classifica-tion based on approach of risk decomposition allows determining the factors of risk of various levels and also shows the connection between these factors and both systematic and unsystematic risks.
Reengineering, crafting and comparing business valuation models–the advisory exemplar, Srinivasa Reddy, K., Agrawal, R., & Nangia, V. K. (2013). Reengineering, crafting and comparing business valuation models–the advisory exemplar. International Journal of Commerce and Management, 23(3), 216-241.
An Intelligent information segmentation approach to extract financial data for business valuation, Seng, J. L., & Lai, J. T. (2010). An Intelligent information segmentation approach to extract financial data for business valuation. Expert Systems with Applications, 37(9), 6515-6530. Due to an increase in the wealth of electronic resources on the Internet in the past several years, the birth of the search engine has brought the utmost convenience and efficiency for users. However, searching for data by keyword retrieval techniques in information retrieval is not contented with some users’ specific needs due to a large number of network resources and users on the Internet. Information extraction is an improvement method which extracts the important specific event or produces specific relations among information from documents. Information extraction can not only filter unnecessary information in any documents but also produce specific important messages and summaries that users are interested in. Business valuation is collecting, analysis, and applying to financial or non-financial integral information to appraise the business value. The evaluated results are used in the commerce pricing for the business decision and intangible assets. There are specific information and events about business valuation stored in the Intelligent financial statements, notes to financial statements, and financial news of Taiwan’s companies at present and data is presented by the HTML and PDF files. Hence, we developed an information extraction system of Chinese financial data for business valuation from the domestic business financial statements, notes to financial statements, and financial news as the data sources. We extracted the correct financial data and their corresponding Business Valuation Model to achieve an automatic extraction in the financial data from these different heterogeneous data sources. Users can collect the relevant valid valuation information and learn valuation models concepts within a very short time to improve accuracy and efficiency in text processing quality.