Corporate Finance

When conducting a valuation of a company, a common mistake would be to assume the financial statements and the value will mirror one another. In a perfect world, this kind of logic would apply. There are many factors other than a company’s financial statements that contribute to its value. As a result, there are many instances where a company’s financial statements and value drastically differ.

One reason for a difference between financial statements and the actual value of a company is the purpose for conducting a business valuation. There are a number of reasons a company may seek a valuation, and they greatly impact the results. Some possible reasons for a valuation include: buying a business or taking in a new partner, selling a business, settling an estate that includes an owned business, and attracting venture or debt capital. Another reason for a difference in an organization’s value and its financial statements is the consideration of factors with no numeric value. Industry, consumer concentration, attractiveness, stability, and location are additional factors to be considered in the valuation process of a company. When considering an organization’s industry, one must note whether the industry is growing or shrinking. The future of a business within a shrinking industry is not very promising. Many investors like to consider the customer concentration of an organization. It is good to know if one or a few customers make up a large portion of total business on an outgoing basis. Although attractiveness is a subjective measurement, it no secret that investors may deem a particular company more attractive than another within a specific industry. The potential of a company is a significant factor in the valuation process. There are many instances where the company’s performance may not be the best, but it has great potential. The inclusion of a company’s potential in the valuation process may result in a higher than expected value for the...