The importance of business valuation
started this topic @ 14:03 on 19/10/2003
Many believe that the process of valuing a business is carried out only at the point of buying or selling a business. But valuation is a versatile tool and can have a profound effect on the actions of managers. Used as a business performance indicator, it can demonstrate the direction the business is heading. If the process is undertaken periodically, it can identify when strategy is working on a whole business perspective.
Organisations owning a number of independent business units (SBU) have to decide how the limited corporate fund pool should be distributed. Valuation can be a major component of the filtering process. Those business units demonstrating the largest value growth and therefore making an important contribution to corporate value would receive a proportional slice of the money pie. Greater or lesser autonomy would be granted to the SBU management thereby freeing up corporate management time.
Valuation can be an important management focus and motivation tool. Accounting forecasts, profit/loss statement and balance sheet can sometimes give a misleading view of the success of the business as they can incorporate components which may have little realisable worth. Managers relying on these could be unaware that they are leading the firm into trouble. Here, valuation is a useful ‘checking mechanism’ if used in addition to conventional formats.
Valuation is also a useful barometer to assess the life cycle position of the industry. If, over time, value drops, management can look to see if more resources are being required to maintain market position. This could mean that demand in the industry is wavering and that the industry has either matured or is in decline. A timely exit could ensure a better price for the existing business and also eliminate critical losses. Conversely, a steady increase in value could signal an industry in the growth stage and give management the confidence to seek market penetration opportunities.
The important aspect of utilising valuation as a performance tool is that it can be carried out by organisations of any size. Its relevance is universal and its scope is broad. Because it is a corporate wide analysis, a general picture of the business’s position in terms of its market and industry are achieved. Its versatility means that it can compliment existing management tools and serve as a filtering process to project appraisal exercises.
However, what is crucially important is the method used in the valuation process. The analysis must be transparent, take into consideration outside influences, its processes understandable and consider not just past variables but present and indeed future. All these considerations are reflected in the design and presentation of the business valuation software VALUER.
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