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FAQs

 

Answers To Some Commonly Asked Questions

 

 

What is the difference between a business appraisal and a business valuation?

They are essentially the same thing. In each case they are an opinion regarding value based on a range of different valuation approaches. The terms of the report will define the scope.

A formal valuation is often needed when it is required in some kind of legal process involving other parties, for instance divorce proceedings or a legal suit. An appraisal, such as that conducted in the ValumetrixTM process, is intended to guide planning by the owners of a business. Consequently, it relies upon the accuracy of statements provided by the company without further auditing or cross-checking.

The Valumetrix methodology focuses on understanding the business performance on a range of value drivers that contribute to the value of the business beyond what the financial statements may show.

How do you define value?

Fundamentally, the value of a business is the point of equilibrium between the lowest price a vendor will accept and the highest offer a buyer is prepared to make.

There are various definitions of value which are commonly used in establishing the basis for negotiating a sale. These include:

Fair Market Value is the price at which a business would change hands between a willing buyer and a willing seller, when the former is under no compulsion to buy and the latter is under no compulsion to sell, with both parties having reasonable knowledge of relevant facts. This is the most commonly used standard of value in business valuations.

Investment Value is the value to a particular buyer or investor, based on their particular investment requirements and expectations. It takes account of future strategy and expected synergies when the businesses are combined. The Investment Value approach is commonly used in mergers and acquisitions.

Book Value is an accounting concept and based upon accepted accounting standards. However, it rarely equates to the enterprise value of the business. 

When should I undertake a valuation appraisal?

You should always have an appraisal done before entering into a sale process. This will provide you with a useful guideline before you enter into negotiations with an investor or acquirer.

However, as a valuation is the yardstick by which you measure progress on your business strategy,  conducting an initial appraisal early provides you with a baseline. Subsequently, a further appraisal on a yearly basis can provide useful input to your annual strategy review process.

How does the business valuation appraisal process work?

Our process involves analyzing financial data, market trends, understanding the operational aspects and assessing other factors to provide an indicative valuation range. We apply a range of valuation methods to ensure a balanced approach to that value. The ValumetrixTM method also provides you with a set of KPIs that help you keep track of your progress towards your end goals.

Are minority interests valued differently to a control interest?

Generally the rights and benefits of a controlling shareholding means that they command a higher price.  The inability of a minority shareholder to set policy, strategy, compensation and dividend decisions tends to result in discount being applied to that minority interest. 

What type of business valuation do I need?

The terms of a valuation engagement will define the scope of the valuation. What is required for a legal situation or where the valuation will be relied upon by other parties is different to that used within a company to guide and assess its performance. Valumetrix focuses upon business appraisals intended for the latter purpose.

Are private companies valued differently to publicly listed entities?

The ability to sell stock has a significant impact upon the valuation of those shares. This is known as marketability. Publicly listed companies have an established marketplace where stock can be relatively easily traded.  Investors that hold stocks which lack liquidity require a higher rate of return to offset the longer holding period and uncertainty around liquidity. This higher expected return results in a greater discount being applied to the stock value.

Gauging this discount is a core element in M&A activities.