Valuation is an effective management tool, which helps the business in achieving the business objective by showing the value of business in its life cycle. In general valuation is done to resolve tax/legal issues; however it is also performed for various reasons like selling a business or acquiring a business.
Valuation has a set of procedures which are set to estimate the economic value of an owner's interest in a business. Valuation is done by a qualified person, they first analyse the company's financial statements and consider both quantitative information and qualitative information.
Then the necessary adjustments are made to benchmark. Sometimes valuation exposes the weak financials, underperforming assets, accounting controls and operating ratio (which are weak). Overall valuation process provides both strength and weakness of a company
Key considerations considered while valuation are nature of business, business background, products, services, economic environment, life cycle (industry), political environment, customer relationships, compensations, working capitals, liabilities, goodwill, intangible assets, market position, industry landscape (competitive), customer base, assets, market approach, business interest etc.
The importance of valuation in merger and acquisition is explained below −
Baselin − Valuation serves as an indicator and tells about what can be done. Valuation tells how you are doing in business.
Future course − Valuations tells about the improvements/changes in business, technology needs and employees' requirements.
Progress − Valuation tells about business progress compared with forecasted to actual/real. It plays a significant role in decision making.
Gap identification − Key performance indicators are used in identifying gaps and for potential improvements in business.
Manage − Valuation helps business to have a holistic view and helps in making strategic decisions, which have impact on the bottom line of business.
Accountability − After gaps are identified, there occurs accountability in achieving the goals.
Benchmark − Helps in creating benchmarks (if no data available) against their competitors.
Price − Past valuations help in fixing base price. By knowing the base price, we can estimate the worth of the product/service.
Capital − In borrowing a capital, financial institutions/private parties/Banks will ask for valuation first.
Property plan − With the valuation, owners can plan to increase their/business financials for the future.