Running Head: BUSINESS VALUATION ISSUE ESSAY 1
Business Valuation Issue Essay
Julie Mather
Liberty University Online
BUSINESS VALUATION ISSUE ESSAY 2
Business Valuation Essay
Valuation professionals rely on the premises of value which establish where the value lies
and to whom when preparing appraisals for the sale, transfer of ownership, or liquidation of a
company. While the appropriate standard of value is derived from multiple scenarios intended for
use in appraisals, private sales, and litigations, analysts must depend on the information at hand
to accurately evaluate the company’s worth. While the financial information for publicly traded
companies is readily available for stockholder’s and investment bankers to review annually for
performance, the financial background of a private company is not as accessible to evaluators.
Identifying and integrating external and internal data in the valuation report is necessary for a
more complete and comprehensive valuation. This essay discusses the issues presented when
deriving the valuation for privately held companies.
Developing a through valuation report for private companies is not as straight forward as
it would be for a public company due to the compounding factors such as historical financial
data, lack of precedent in dealings, and internal sense of value to owner’s and board members.
Determining the fair market value defined as the price at which the property would change hands
between a willing buyer and a willing seller, neither being under the compulsion to buy or to sell
and both having reasonable knowledge of relevant facts. Watkins explains that the lack of stock
market influence and historical earnings can create doubt and lack of clarity in potential buyers
(pg, 26, 2009). For investment analysts to include all variables associated with the valuation of a
private company, the capability to overcome the lack of instant and tangible historical data as
proven by the stock market or business precedent is essential. Collecting data is a complex
process that can be lengthy for analysts as both external and internal data must be evaluated
during this course. As private companies do not publish their annual 10-Ks reviewing internal
BUSINESS VALUATION ISSUE ESSAY 3
financial statements along with a thorough review of the industry in which the company does
business can provide a framework for which the beginning fair market value can be derived.
Understanding the depth of research necessary to properly value a private company gives
investment analysts a comprehensive scope of view when preparing an appraisal for the sale of a
company, estate valuation, or transfer of ownership. Private equities are an important and
growing part of capital markets therefore the valuation of these companies is critical in
sustaining business mergers and acquisitions, initial public offerings (IPO), and precise fair
market valuations (Armstrong, Davila, & Foster, 2006). According to the National Venture
Capital Association, “Valuation of a private, venture-backed company’s stock is a process, which
at best is costly, complex, and inexact. Absent new rounds of financing, venture capitalists rarely
have information upon which to base changes of the set stock price because the stock is not
tradable, and the companies tend to be unique, with no like comparisons to benchmark. And in
the end, the final number will be an inaccurate, inconsistent, and incomparable guess.” This
concept of benchmarking refers to financial precedents that can be used to establish fair market
value. To obtain valuation credibility, analysts must investigate both external and internal sources
of information. A more diverse selection of data provides a more precise valuation closer to the
intrinsic value of the company.
To reduce the risk of undervaluing a privately-owned company, analysts should reach
beyond the historical financial data and research associated documentation, industry analysis,
and utilize valuation models that most effectively derive the fair market value of the company. To
limit the challenge of finding enough information for preparing valuation reports for private
companies, the focus needs to be shifted from relying on financial data only to including industry
research, utilizing multiple valuation models, and additionally evaluating the economic impact.
BUSINESS VALUATION ISSUE ESSAY 4
While it is common to use ore or more valuation models and techniques in business valuation the
eventual goal is to calculate the estimated fair value compared to other industry firms in similar
commercial space (Howe & Lippitt, 2011). Business valuation professionals should invest in
research that will bring a greater valuation for their client’s company to in due course increase
their commissions and fee retention. It is to their benefit as well as the clients to ensure a
valuation that is competitive within the established industry and in the long run launches a
benchmark valuation for future business transactions.
Valuation professionals are challenged to derive the best value for their clients and are
responsible for presenting comprehensive valuation reports that encompass all areas of a
company’s financial footprint along with non-financial contributing value to the industry closest
to fair market value. Both sellers and buyers want the best price for their investment and rely on
the information provided by these valuation reports therefore the valuation analysts are
responsible for providing the necessary information for the sale of private firms, solving
company valuation disputes during litigation, transfer of ownership, estate planning, and mergers
and acquisitions. While the level of information for private company valuation is not as readily
available as compared to public companies, investment professionals can utilize external
information sources to still present accurate valuations.
BUSINESS VALUATION ISSUE ESSAY 5
References
Armstrong, C., Davila, A., & Foster, G. (2006). Venture-backed private equity valuation and
financial statement information. Review of Accounting Studies, 11(1), 119-154.
doi:http://dx.doi.org.ezproxy.liberty.edu/10.1007/s11142-006-6398-8
Howe, H., & Lippitt, J. W. (2011). Uncertainty disclosure in disputed business
valuations. Journal of Legal Economics, 18(1), 27-VI. Retrieved from
http://ezproxy.liberty.edu/login?url=https://search-proquest-
com.ezproxy.liberty.edu/docview/912868964?accountid=12085
Watkins, W. (2009). Valuations the challenges facing private vs. public companies. Accountancy
SA, , 26-27. Retrieved from http://ezproxy.liberty.edu/login?url=https://search-proquest-
com.ezproxy.liberty.edu/docview/215224161?accountid=12085
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