A review of the business valuation process – in theoretical and practical

Abstract

Background and problem discussion: Business valuation is no precise science. There is no universal legal framework which dictates how the valuation should be performed and therefore, it is no right way to estimate a company’s value. However, there is a lot of literature within the business valuation area which could help facilitate the valuation procedure and minimize the risk of failure. It is thus interesting to study and review the business valuation process in theory and in practise to see how it should be performed and how it is in reality. Aim of the study: The purpose of this paper is to provide an overview of the business valuation process according to the theory and to map out the assumptions that underlie this process. Additionally it aims to compare the appraisers’ valuation process, with the compiled theoretical framework in order to identify the differences and likenesses and then to interpret them. Furthermore the purpose is to review the valuation procedure between different appraisers and to be able to make a conclusion if there is a specific framework that is used in general. Delimitations: This paper focuses on the general use of the business valuation process and therefore no specific attention to a certain industry or phase of the business valuation process will be examined. Only the three most well-recognized valuation models among many existing, asset-based, income-based, and market-based approaches are presented. Moreover the paper studies only a company’s value as a result of the valuation process and not the value given through negotiation. Method: In order to answer the issues of this thesis the studying of the relevant literature on the subject and qualitative interview-investigation were conducted. The interviews were performed with three professional appraisers and one interview with a theorist. Furthermore, collected information was analysed and conclusions have been made on the basis of the analysis. Analysis and conclusion: According to the result of this study, there is no unique framework for the business valuation process that exists in practice. The appraisers’ valuation procedure is based on the primary valuation idea presented in the theory however the particular appraiser has developed their own framework which is derived from their experience and knowledge. In the authors’ opinion it is impossible to obtain a framework which could cover all aspects that may have influence on business valuation and eliminate the subjectivity caused by the personal character of the appraiser.