Why do you need Business Valuation?

[2021] 130 taxmann.com 203 (Article)

The recent Zomato IPO has shown us one thing above everything else that the regular valuation of your business can’t be ignored anymore. Zomato is an app-based delivery system, which has nothing major on the sheets when it comes to physical asset valuation. Traditional businesses keep on adding to their assets to build up their company valuation, in the hope of becoming TATAs and Birlas of the world, but they can’t. Here Zomato with one sweep off the floor hit the roof with its IPO.

Business Valuation cannot be ignored in these times when asset-less start-ups are getting valued much higher than asset-rich corporations.

What is Valuation

Valuation is a process to determine the worth of an Asset. The Process can involve futuristic forecasting based on past and present performance but not limited to earnings on profits only.

Security Valuation

While determining the fair value of security, it is important to take into account the amount one party is willing to pay another.

It is important to note that a security’s intrinsic value has nothing to do with the market price. A stock or bond’s perceived worth on an open exchange can fluctuate wildly based on who wants what and when, but this has nothing at all to say about its true worth as seen in terms of future earnings potential for example. Analysts must often determine if a company is undervalued or overpriced. They will look at the market to see what it’s worth, and then compare that with how much they believe an asset should be valued based on its own merits.

Assets or Liabilities Valuation

Valuations are performed for assets or liabilities due to a number of reasons. Valuing an asset can be required to perform merger and acquisition transactions, capital budgeting, investment analysis, litigation purposes as well as financial reporting. For example, if you’re looking at the value of your company’s bonds in order to determine how much money is owed back from them then it might make sense that valuers would need to evaluate what they’re worth because people don’t usually give away things without expecting some kind of compensation for their generosity!

Methods for Business Valuation

The purpose of Valuation leads to the adoption of methods for valuing a business. There are three widely accepted fundamental methods used in valuing closely held business interests. These include the asset, income, and market approach. The most useful method will depend on several factors including but not limited to whether it is for a personal or charitable circumstance as well as the type of company being valued.

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