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Why do we need a Valuation Approach in performing Finance Functions?
Valuation is the process of finding the present value of a business. It can be done in many ways but some factors are needed for valuation, such as the probable future earnings, management structure of the business, the market capitalization of the company’s assets, and its capital budgeting structure composition.
Valuation is also done to find out the fair value of a security which a buyer will pay the seller. Intrinsic valuation tells the analysts the investors in the share market whether a stock is under or overvalued and depending on this the future value of the stock is determined.
Note − Valuation is a part of the finance function because it is derived from and used to deal with a lot of finance functions.
Here are some financial functions that are backed up by valuation −
Strategic Planning
It is not possible to determine the true value of a company without a depreciation schedule and balance sheets may not tell the truth.Therefore, for strategic planning valuation is an important tool.
Funding
Valuation is needed during negotiations with financial institutions when a company raises funds from financial organizations, such as banks.Without proper valuation, a company may fail to achieve the needed funds for operations and growth.
Note − Funding or fundraising needs planning and valuation is an inseparable tool for finding the best value for a business.
Sale of Shares
If a business wants to sell its shares it must know the fair value of the share for which valuation is needed. Without knowing the price of a share businesses cannot sell them at the right price.
Sale of a Business
The sellers of businesses must know the value of their business. Valuation helps them know the current value so that they do not sell it below the exact price of their business.
Buying a Business
The reason for valuation is also applicable to business buyers as it is meant for sellers. The buyers must know the exact value of a business to buy it at the correct price.
Litigation
The value of a business is required during litigations or court cases. If you do not know the value of your business, the court processes may attach larger damage by you than what should be actually done.
Exit Strategy Planning
The exit from a business must be as profitable as possible and this must be done by exit strategy planning. The planning must find the best value of the business and should show at which price it should be sold for getting the best price.
Note − Knowing the best value of a business is unavoidable during buying and selling a business.
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