Business Valuation: Importance, Approaches, and Issues

Running head: BUSINESS VALUATION
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BUSINESS VALUATION
Name
Institutional Affiliation

BUSINESS VALUATION
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BUSINESS VALUATION
Executive summary
This report entails details of what is valuation, how it is done and when it did. It gives
issues about valuation that revolve around businesses. It has also explained the market and
income approaches to valuation. Opinions and criticism on valuation using the article as a case
study that talks about valuation for small businesses have been laid down.
Introduction
Business valuation is a way of defining the economic value of an organization, company
or business economically (Trugman, 2016). The reasons behind valuation include the need to
know the value of sales, for dissolution of a business, how far the business stands against its
competitors or during transfer of ownership. The evaluation involves a business management
analysis, the analyzing of the value of its assets and the business`s capital structure. Approaches
like financial statements review, comparisons between companies and models relating to
discounting cash flows are used. A business can be valued through market capitalization,
earnings multiplier, book value, liquidation value and discounted cash flow technique (Anderson,
2013).
KEY ISSUES IN THE CASE
The reasons for why small businesses do not perform valuation are because the owners
don’t want to invest money into it and their time ( (Miller, 2017)
The importance of valuation a business is included. These include:

BUSINESS VALUATION
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A business owner becoming incapacitate or dying hence those left behind will need the records
of the valuation during the sale of the business (Malhotra & Temponi, 2010). Furthermore, when
a merging or an opportunity to sell the business comes unexpectedly, quick decisions need to be
made during negotiations with potential buyers. A buy-in-price for a new partner and amount to
pay out a shareholder should be determined. When a loan for expansion of a business is needed,
valuation records are important. The value of the business should be realized in case of an
occurrence of a risk so that an insurance company knows how much to compensate the business
owners. When divorce in a business is underway, valuation is important for there to be an equal
settlement of the issue.
Who to go to for valuation
Both law firms and accountants undertake valuation procedures. Accounting firms are
conservative and give a lower value to the business while laws firms tend to be are optimistic
giving a higher value to the firm. They don’t give the correct qualitative factors properly. These
relate to financial performance, management skills, and the overall industry status.
Ways that big companies use for valuation are addressed. They have sophisticated
procedures with detailed valuation. It could be prepared using earnings-based valuation
techniques (Seng & Lai, 2010). They compare companies in the industry, comparing mergers
and using discounted cash flows analysis to check future cash flows. A leveraged buyout
technique to compute the business`s value depending on the acquisition debt that a given
company can support.
HOW THE ISSUE RELATE TO TOPICS IN THE UNIT?