There are numerous situations which call for the value of a business to be determined.
The classic case is no doubt when a business is to be bought or sold. In these circumstances, the valuator is not able to determine the actual price to be paid since this will be agreed by negotiation between the parties. However, the valuator is able to give some idea of the business's value as a realistic point of reference and document it in a valuation report intended, for example, for the bank putting up the finance.
In the event of family or inheritance disputes and conflicts between companies, it might be necessary to determine the value of a business involved in the dispute. This might indeed be ordered by a court.
There are also a number of tax-related reasons. When funds are being contributed to or withdrawn from a firm's working capital, the market value is required. Business valuation is also necessary in inheritance or anticipated inheritance cases and where accounting questions arise, e.g. in the event of an impairment test or purchase price allocation.
The valuation method will generally depend on the nature of the assignment, the reason for it and the characteristics of the case. While the capitalised earnings method is most frequently applied to business sales (and often also the discounted cash flow method in cross-border cases), in the case of disputes between companies, the relevant provisions of the articles of association must be complied with. Other specific valuation methods might be applicable under tax law.
Simplified market methods, such as multiple methods, should be used with caution since simplification gives rise to significant risks. They can, however, be well suited to plausibility checks on valuation results. It is, however, recommended for some industries (in particular for freelance professionals) to apply certain multiple methods.
The nature and scope of the valuation must therefore be attuned to the individual case. Valuation reports should always be submitted in writing in order to facilitate comprehension of the assumptions made, method applied and the result arrived at.