Corporate valuation

The financial manager may want to value the business for many financial reasons, including a purchase, sales, merger, litigation, tax matter and attempt to expand the credit line. The valuation depends on the purpose at hand. Corporate valuation provides the financial manager with several sound ways to calculate what the entity is worth. The valuation methods may apply to any situation in which the value of the business must be made.

In valuing the business, the following factors should be taken into account; nature of the company and its major operations, competition, economic and politics, health of the industry, customer base, history of the business, degree of risk, trend and stability of earning, marketing factors, maturity of business, financial status, growth potential and quality of management.

As the first step in valuation, the key financial information must be accumulated and analyzed, including historical and foretasted financial statements. The major assumptions of the valuation must be clearly spelled out.

The valuation methods are based on assumption that an entity is a “going concern”. the valuation approaches may be profit or assets oriented. Earning may be capitalized at an appropriate multiplier. Future adjusted cash earnings may be discounted by the projected rate of return. Assets may be valued at fair market value, such as by appraisals.

Business valuation software exists, including those with many ratios and graphs. Software packages may use multiple valuation methods. The packages may include historical and projected earnings and cash flow date.

Reasons for valuation of business enterprise

1) Amalgamation or merger with another enterprise.
2) Closure and sale of assets due to liquidation or other reasons.
3) Assessment of fund-raising capacity and required rating by lenders.
4) Issue of shares.
5) Partial or full privatization.
6) The enterprise’s own internal exercise for the knowledge of owners and top executives.
7) Group restructuring exercise leading to mergers and DE-mergers inside the group.
8) Strategic alliances and joint ventures with domestic and international partners.
9) Sale (or exchange) of a few assets, brands and other claims.
10) Governmental requirements for taxation, securitization, etc.
11) Rehabilitation of a sick or dying enterprise.
12) Significant change to be made in the value-chain knowing the independent strength of value-drivers contributing to the value-chain of the enterprise.
13) Converting key employees into entrepreneurial employees and then into equal partners in the enterprise.
14) Valuation of goodwill for its presentation in the balance sheet or for charging royalty to dealers, representatives, group-members, etc.
15) Partial valuation of certain divisions and product-lines, for partial restructuring.