Question

Give one example or scenario of business valuation, and discuss why might valuation matter to a company.

Answer 1

Valuation is an important process in the corporate world. While it is complex, it certainly is necessary and desired before any major decision making process like merger & acquisition , IPO process etc.

One of the recent valuation that comes to mind is that of social media app, which was acquired by Facebook for a whopping $19 billion. This acquisition is a classic example as to why valuation are necessary. It is important to question as to how Facebook valued the firm at $19 billion? It is crucial to remember that valuation takes into consideration both financial and non-financial metric. Financial metric include revenue profit, business growth etc.Non-financial metric in case of the acquired firm were its 450 million users in 5 years and addition of 1 million new users every day.

Valuation matters to a company because -

1.It helps in accurately estimating the worth of the target company

2.Every business is unique and hence require independent evaluation

3.To take care of matters related to taxes like capital gain tax and inheritance.

4.To resolve disputes between shareholders by transfer or sale of ownership.