09 Nov, 2017
Company Valuation Methods (Part 1)
Understanding the mechanisms of company valuation is useful not only because of the importance of valuation in acquisitions and mergers but also because the process of valuing the company and its business units helps identify sources of economic value creation and destruction within the company.
Generally speaking, a company’s value is different for different buyers and it may also be different for the buyer and the seller. Value should not be confused with price, which is the quantity agreed between the seller and the buyer in the sale of a company. This difference in a specific company’s value may be due to a multitude of reasons.
For example, a large and technologically highly advanced foreign company wishes to buy a well-known national company in order to gain entry into the local market, using the reputation of the local brand. In this case, the foreign buyer will only value the brand but not the plant, machinery, etc. as it has more advanced assets of its own. However, the seller will give a very high value to its material resources, as they are able to continue producing. From the buyer’s viewpoint, the basic aim is to determine the maximum value it should be prepared to pay for what the company it wishes to buy is able to contribute. From the seller’s viewpoint, the aim is to ascertain what should be the minimum value at which it should accept the operation. These are the two figures that face each other across the table in a negotiation until a price is finally agreed on, which is usually somewhere between the two extremes. A company may also have different values for different buyers due to economies of scale, economies of scope, or different perceptions about the industry and the company.
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