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Aims in Company Valuation


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Normally, the development of aims in company valuation takes place in the context of some kind of economic transaction.

A company has different value for different buyers and for the seller.

For instance, a large, technologically advanced foreign company that wishes to buy another well-known national company in order to enter our market, taking advantage of the reputation of the local brand, will only value the brand, but will not value the facilities, machinery and so on, since it has more advanced assets.

On the other hand, the seller will value his material resources very positively since they are able to continue producing. From the former's point of view, it is a matter of determining the maximum value, and from the seller's point of view, it is a question of knowing what the minimum value at which he should sell will be.

Aims in Company Valuation

These two figures are the ones that are confronted in a negotiation in which a price that is finally agreed is usually somewhere in between the two.A company may also be worth different values to different buyers for various reasons: different perceptions of the future of the industry and the company, different strategies, economies of scale, complementarity economies, etc.

An assessment serves many different purposes:

1. Sale and purchase transactions.

  • For the buyer, the valuation indicates the maximum price to pay.
  • For the seller, the valuation indicates the minimum price at which the seller must sell. It also provides an estimate of how much different buyers may be willing to offer.

2. Valuations of listed companies.

  • The valuation is used to compare the obtained value with the share price on the market and to decide whether to sell, buy or keep the shares.
  • The valuation of several companies is used to decide on which stocks to concentrate your portfolio: those that seem to be most undervalued by the market.
  • The valuation of several firms and their evolution is used to make comparisons between them and to adopt strategies.

3. Initial public offerings.

Valuation is the way to justify the price at which shares are offered to the public.

4. Inheritance and wills.

Valuation is used to compare the value of shares with the value of other assets.

5. Value-creation-based remuneration systems.

The valuation of a company or business unit is fundamental to quantifying the creation of value attributable to the managers who are being evaluated.

6. Identification of value drivers.

  • The valuation process of a company or business unit is essential to identify and prioritise the main value drivers.
  • Valuation makes it possible to identify the sources of value creation and destruction.

7. Strategic decisions on business continuity.

The valuation of a company and its business units is a preliminary step to the decision of staying in business, selling, merging, milking, growing or buying other companies.

8. Strategic planning.

  • Valuation of the company and the different business units is fundamental in order to decide which products, business lines, countries or customers to maintain, strengthen or abandon.
  • Valuation allows us to measure the impact of the company's possible policies and strategies on the creation and destruction of value.

9. Arbitration proceedings.

  • Company valuation is a requirement to be submitted by the parties in price disputes.
  • The best-supported valuation is usually closer to the decision of the arbitration court.

There is also the intermediate position which considers the views of buyer and seller and is represented by the figure of the neutral arbitrator. Arbitration is being more commonly used in disputes. For instance, in the sale and purchase of companies, in the settlement of contracts, in cases of division of estates due to inheritance, etc.

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