Why is a Business Valuation needed when conducting a business merger or sale?

Do you know what to do before you sell your business or go conduct a business merger?

There comes a time when business people have to make a choice about the future of their businesses. Some of them consider selling their businesses while others would make merging with another company one of the options on the table. During such a time, a business valuation becomes crucial to the company and its shareholders. Determining what a business is worth is crucial to the company about to be sold or merged with. Having the business valued offers considerable interest to the parties considering merging or buying out the business. In this article, we will look at a few reasons why this is true.

Importance of a Valuation during a Merger/Sale

To understand its importance, you would first need to understand the meaning of a business valuation. A valuation is a report estimating the worth of a business, compiled by a professional and usually independent valuation company. Here is why having a valuation conducted on a business is important during a merger or sale.

Fair Market Value

When part of a business’s succession plan is a sale to a third party, a business valuation can aid the seller to come up with an asking price for his company based on the fair market value listed on the valuation. Confirming the value of a business will help the potential seller to sell off his business at a price above, or almost equal to the market share as opposed to below it. This is because a valuation adds credibility to the asking price of the seller.

Sellers are not the only ones who get the fair market value benefit from valuations. A merging company can increase its negotiation power during a merger if it is discovered that it had undervalued its assets.

Peace of Mind

A business valuation is considered a legitimate estimation of the worth of a business. During the procedure, businesses hand in their financial data for analysis, including data about their assets and debts. Enterprises about to enter a sale or merger deal with such a company, therefore, consider getting a valuation a gesture of trust. When a company submits to a valuation before these types of deals, it offers peace of mind to the potential buyers or merging companies.

Executive Decision-making

Making a sale or a merger requires that a company know its ability to support these decisions. For instance, merging or up-for-sale companies need to identify and support decisions such as whether to keep or lay off their employees based on the productivity of the workers, their necessity and the money available for the business to cover their salaries or wages. A company revealed to be in poor financial standing after a valuation could consider handing its employees’ severance packages when merging with another, whereas another would use its asset power to negotiate the integration of its workers into the newly merged organization.

Other executive decisions interdependent with the financial position of a merging or selling company include the scale of operations, number of services rendered to consumers. Merging companies could also decide whether or not to sell certain departments during the process based on business valuations.

Mathieu Paul
Director – Business Improvement
P: +618 6315 2755
E: enquiries@wabusinessvaluations.com.au


The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.

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