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Business Valuation in Mergers and Acquisitions

On Behalf of | Jan 10, 2023 | Firm News

Business valuation plays an essential role in mergers & acquisitions by helping both buyers and sellers come to agreements that are beneficial for everyone involved. By understanding what business valuation is all about—and familiarizing yourself with some common methods used in this process—you can make informed decisions when negotiating transactions involving companies or assets you might be interested in acquiring or selling.

If you need help with a business valuation in mergers and acquisitions, contact our detail-oriented attorney at the Law Offices of Jerry J Goldstein. Our skilled business attorney serves clients throughout the Coachella Valley, including Palm Desert, California, as well as communities in and around Imperial, Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties, among others.

What Is a Business Valuation?

Business valuation is a critical component of any merger or acquisition. It is the process of determining the value of a business, either as a whole or in parts, and it can be used to assess a company’s worth, negotiate the terms of an acquisition, and calculate taxes.

Business valuation is an assessment of the economic value of an entire business or its individual assets. This could include real estate holdings, intellectual property rights, inventory, machinery and equipment, accounts receivable, contracts with customers or suppliers, and name recognition. A business’s value has implications for potential buyers—it determines how much they will be willing to pay for it—as well as for existing owners, as it provides both the amount they may anticipate receiving in a sale as well as an estimate of the taxes they will be required to pay upon the closing of the sale.

Why Is Business Valuation Important in Mergers & Acquisitions?

Business valuation plays an important role in mergers and acquisitions (M&A). It helps buyers determine how much they should pay for a company (or its individual assets) by offering an objective assessment of its worth.

Knowing the value allows buyers to make more informed decisions about whether to proceed with negotiations and how much they should offer based on their own financial goals and market conditions. On the other hand, sellers use it to estimate their expected proceeds from the sale. This helps them determine if they are willing to accept an offer or if they need to negotiate further before reaching an agreement.

Methods of Valuation

There are several different methods used to determine how much a business is worth when considering mergers or acquisitions. Some common ones include:

  • asset-based approaches such as book value (the amount shown on balance sheets) or liquidation value (the amount you would get if you sold all your assets);
  • discounted cash flow (DCF);
  • net present value (NPV);
  • comparable transactions (looking at what similar businesses have sold for recently);
  • capitalization of earnings (COE); and
  • option pricing models (OPM).

Each approach has advantages and disadvantages depending on factors like market conditions and the size/complexity/maturity of the company being valued. Consult with an experienced business attorney to understand which approach best fits your situation before making any decisions about M&A activities.

What Is the Process of Assigning Value to a Business?

Generally, the business valuation process includes the following steps:

  • Hire a business law attorney. Seeking the assistance of a skilled attorney to perform business valuation is crucial. An experienced lawyer will help you determine the value of your existing (if you are the seller) or future (if you are the buyer) business, possibly by engaging business appraisers experienced with valuing businesses such as yours.
  • Determine the purpose of the valuation. The valuation approach will depend on the purpose of the valuation.
  • Determine the basis of value. The basis of value may be stipulated by law, contract, or regulation.
  • Gather the necessary documentation and data. Business valuations involve a significant amount of documents and data, which are provided to the appraiser.
  • Assess the future outlook. Determining the future outlook for the business is necessary to forecast future value and incentivize the purchase price.
  • Determine the valuation approach. As mentioned earlier, there are several methods of valuation available. During this step of the valuation process, you need to select the appropriate approach for valuation.
  • Reach a conclusion on the value. Finally, it is time to reach a conclusion on the value and prepare a valuation report.

Reach out to a knowledgeable attorney to guide you through every step of the business valuation process. At the Law Offices of Jerry J Goldstein, we are prepared to help clients with the complex issues surrounding business valuation.

Rely on Trusted Representation

The business attorney at the Law Offices of Jerry J Goldstein has helped companies and entities in a wide range of industries attain accurate business and asset valuations in mergers & acquisitions throughout the world. Please note that in providing services outside of our immediate area, we generally don’t bill for travel time from our offices to meet at the business location or home of our clients.