Valuation isn’t an objective exercise and any preconceptions and biases that an analyst brings to the method can notice their approach into value”.It is merely outlined, a business valuation is an examination conducted towards rendering an estimate or opinion on the honest value of a business interest at a given purpose in time.
Generally, when valuing a business, a notional transaction is assumed, that is, one which has not been subjected to the bargaining process. Like accounting, valuation is an art rather than an exact science, and a properly conducted valuation is nothing more than an expression of informed opinion, which is based on fact and judgment. By their very nature, valuations are not precise. Consequently, valuation estimates and opinions are generally stated as a range of values. Business valuation is no precise science. There is no universal legal framework that dictates, however, the valuation ought to be performed. Therefore, it is no right way to estimate a company’s value.
When is a valuation required?
Examples of when a business valuation may be required include any of the following instances:
• shareholder disputes
• purchase/sale of a business interest
• non-arm’s length transaction
• oppressed minority shareholder actions
• damage claims
• buy/sell agreements
• marital disputes
• estate planning
• deemed disposition at death
• litigation support
Value In order to understand valuation, first we need to understand the value. It is often the most complicated and misunderstood. Value is a subjective term as what is valuable to one person may not be the same for others. It is easy to understand the concept of value with the help of the value of a property because all of us are well known to it. But it’s tasking to worth this well-known quality.
A property might be more valuable to one person in comparison to another because that person values certain features of the property higher than the other person. Alternatively, the property might need a better utility to at least one person than to a different. There may be many forces, which influences the value of a property e.g., environmental and physical characteristics of the property, social standards, economic trends like GDP, per capita income, inflation, etc. and political or government regulations. It is clearly defined market value as, “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the client and merchant every acting providentially and knowledgeable, and presumptuous the value isn’t tormented by an undue stimulant.” However, the ideas of an open market, fair sale, action with prudence & knowledge and non-happing of undue stimulus are all subjective and most often, unrealistic assumptions. There may be a substantial gap between subjective valuations and fluctuations of the free market. Thus, the worth of a property doesn’t forever correspond to its value. As a result, despite rigorous efforts by time series econometricians the forces of supply and demand cannot be scientifically predicted.
In a nutshell, value is the “typical price a product fetches in an unregulated market”. There are different types of values which are used in different ways of everyday business. These are original value, book value, depreciated value, sale value, purchase value, replacement value, market value, economic value, residual value, scrap value, etc. What investors buy are future benefits and not the past? The point to be carefully noted that there is nothing called the ‘correct value’ or the’ right value’. It all depends upon the type of value which is being measured, the purpose of valuation, the methods adopted and the assumptions made. The evaluation which seems to be ‘base’ today, may be criticized and rejected tomorrow based on variations in the subjective conditions, that we have discussed.