Is business Valuation Necessary?

Valuation in finance means finding out worth of a business, stock, product, customer, or particular segment or division of a company. The Business Valuation means that how much a business is worth to a company. Companies value their customers, their products, divisions and segments to see if it is profitable to be in that product or segment or is it contributing negatively to the profits of the company.

Business Valuations are primarily needed before acquiring a business, merging a business, making an investment, or starting a new business. The business valuation is very important for the investors since it gives an idea to the investor that the business will give him positive and competitive return compared to the investment opportunities. The public companies are valued on their financial statements issued by the management, which an independent auditing body audits.

The company’s valuation for the purpose of mergers and acquisition are done by seeing the company’s cash flows, liabilities, its assets, net pool of equity, brand name, companies R&D, market share in the industry, and its future growth prospects. All these factors are given a somewhat monetary value that analysts expect that company will give in future and these values are then discounted to the present values and the net value of the company is found. The commonly used three methods to value businesses include a comparable company analyses, discounted cash flow analysis, and transaction analysis. These provide a holistic value to the company as a whole.

The stock investors also value the companies since the returns of the stocks also depend on what the company is valued at. The business is valued, and using the valuation the company’s stock price is found. If the company stock is traded below the calculated price then the stock is undervalued, and it is a promising investment opportunity since general investors, when realize that the stock is undervalued, they will start buying it which will correct the mispricing and the investor who invested when the stock was undervalued would gain a good return out of it. The value investors believe that the market is inefficient and the mispriced securities can be found in the market, and they analyze the financial statements and the growth prospects of the company and find out the value of the company.

Apart from these reasons business valuation is necessary because the management/owner can put the company’s resources in the right opportunity. Businesses are in constant flux. The economic conditions, industry, and the economy, all are changing and the efficient use of resources is very important for a business to thrive and prosper. Current business valuations give management ideas, which businesses have more value in terms of future growth and prospects etc., and which is a lost cause and is negatively impacting or might impact negatively on the company’s overall profits. Using valuation analysis the management can decide as to what to divest in the business and where to invest and focus more.