Business valuation techniques can be applied to any entity such as sole proprietorship, partnership and company.
Business valuation is required to find out worth of the business. Worth of the business can be different from reflected in the market share price because of market inefficiencies (imperfection) such as unequal & lack of knowledge among investors, transaction cost, and unequal supply and demand.
Business valuation is a subjective process. It involves the use of financial as well as non-financial information. There are various valuation techniques. Each valuation technique gives different value of the business. Business value calculated using any valuation technique does not give final value at which business can be bought or sold. It merely gives reasonable guidance for negotiating selling or buying price of the business.
Acquirer organization should consider lowest and highest value, which can be paid for acquiring another organization. This will help acquirer to decide on the level of premium to be offered to equity holders to motivate them to sell their shares to the acquirer.
Premium can be paid to shareholder on existing market share price. It is because; organization may feel that it will generate sufficient revenues after acquisition that will justify premium offered. Organization may be able to create synergy benefits such as selling of products related to different organizations as a package, savings in overheads through sharing of office rent, equipments and economies of scales (bulk purchase discounts).
Business valuation is only concern with valuation of investment of equity holders in the company. When one business acquires another business, it purchases equity interest in that business. Profitability performance of the business affects only equity value. Debt (liability) value remains intact regardless of profitability performance.
To determine equity value, value of debt needs to be deducted from total market value or market capitalization of the business.
Acquisition means getting control of another organization. To exercise control over other organization, acquirer must hold at least more than 50% shares in the company.
Offer made to equity holders should consider the level of premium to enable them to obtain 50% shares in the company.
