Business valuationJean-Claude Desnoyers
What is a business valuation? What information can it provide? Many people don’t know what a business valuation is and the importance to deal with a professional in business valuation. If you are one of those people, reading this article will help you understand business valuations, the different values and the different reports that can be provided.
- A business valuation assesses the real value of a business. In other words, it serves to determine the amount that a typical investor should be willing to pay to acquire a business.
- Valuing a business is a formal process that begins with an analysis of the financial statements and a review of the business using a questionnaire. It takes time and information and a value can’t be given in a quick conversation over the phone.
- Depending on the type, nature and characteristics of the business, the value can be determined based on cash flow or the company’s assets.
- It is possible to determine two values;
- The intrinsic value is the true value of the company, that is calculated in the majority of cases. This value is the same, regardless of the potential buyer. In negotiating with a strategic buyer, that value becomes the floor price, or the minimum value that should be considered for the transaction.
- The strategic value is the intrinsic value of the company plus the post-acquisition benefits for a strategic buyer. This value depends on the post-acquisition benefits, so it is different for each strategic buyer. To calculate this value, you must first identify a potential buyer. When selling a business, it is possible to determine the intrinsic value first and then determine the additional value depending on the strategic buyer involved in the negotiation.
- The evaluation must be done at a specific date. It is an image of the company’s value which include its assets, liabilities and income projections at this specific date. The choice of date is important depending on the reason why the assessment is conducted. A Chartered Business Valuator can guide you to determine the right date in accordance with your situation. In the context of a transaction, the value determined has to be adjusted according to the actual date of the transaction.
- A business valuation is governed by standards and practices which are dictated by the Canadian Institute of Chartered Business Valuators (CICBV). A Chartered Business Valuator must comply with them.
- A business valuation is submitted in a report of fifteen pages or more.
- The CICBV recognizes three forms of reports, which can be provided for a business valuation. Contact me to know what kind of report you need according to your situation.
- Calculation of value report: This shorter report includes an analysis of operations. Compared to other reports, the scope of review, the amount of analysis, corroboration of certain information and amount of detail in the report are lower than in other types of reports. It still meets the needs of most small and medium enterprises (SMEs).
- Estimate of value report: This report provides more detailed research on the share’s value, value of an asset or of an ownership stake in a business.
- Comprehensive valuation report: This report provides much more analysis of the company, in terms of research and calculations. More information is gathered on the industry, the economic situation and the factors that may affect the company