Function

A company valuation attempts to determine the true value of a company. If you were considering investing in or buying a going business, a fair value would need to be established. A proper company valuation functions as this value estimation. It is not the only component of the true value of a company: For example, some companies have high levels of intangible assets (like future product development, patents pending, new ideas or software under creation) that indicate a real value much higher than book value.

Warning

A private company valuation is sometimes much more difficult to arrive at than a public company valuation. Because they have registered securities and many stockholders, public companies must continue to publish their financial statements and information, which are audited by outside certified accountants. Private companies are under no such requirement. They may have a few stockholders, but their securities are not registered. If you are considering investing in or purchasing a private company, confidence in their financial numbers and apparent net worth and book value must be established.

Benefits

A reliable private company valuation permits an investor to make an informed decision, and if the company is for sale, helps establish a starting selling price that both seller and buyer can use as a basis for purchase discussions. Due to other considerations, the book value is usually not the final selling price, but a proper net-tangible-assets valuation shows the seller what the business is currently worth on paper, and gives a prospective buyer confidence about what is really being purchased.

Potential

Resources

More Like This

How to Establish the Fair Market Value of a Company

How to Account for Goodwill & Intangible Assets

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