A number of reasons qualify for the valuation of a business. Acquisition and disposals are one of them, although further investments and credit rating are of primary importance.

Valuation is not a precision oriented technique; it just associates a value to the business and its assets, in whole and/or in part, at the present time. The value of a certain asset will differ from one business to another, the basis being its demand. The value is considered using a host of factors including all the assets and liabilities, profits and cash of the business.

Fixed assets require periodic revaluation, preferred by many on an annual basis. The reason is quite simple. Each asset has a worth to the business and has an economic life. Continuous development renders old equipment obsolete, even before their useful life expires. A similar case is for stock that has not been sold. The current trend is to keep stock levels at a minimum, following the just in time system of stock management. The minimum level, however, will differ according to businesses, depending on their rate of stock turnover.

The process of valuation takes into account a combination of the following variables:

The fair market value of all the fixed assets, tangible and intangible. This is the price which the assets would fetch if quoted on the open market
Any improvement costs that may be added to the existing assets and which would qualify as an additional value attached to the asset on sale
The value of inventory (stock) in the open market, including any raw materials, work in progress and finished goods
The level of profit or cash maintained in liquid form in the business

Another variable, targeted to service companies, is a value attached to their customer and credit base, profitability, location, growth pattern, competitors and technology. The value reached is then multiplied by a factor to get the appropriate value of the business.

A comparative of recent business disposals is also used to determine a market value. A variable, such as turnover or asset base, capital etc, is used as a factor against which the value is calculated.

Further ways of valuing the business may include one or a combination of the following:

• Net assets of the business [Fixed Assets + (Current Assets – Current Liabilities) – Long Term Liabilities] .
• Net expected liquidation price at fair market price
• Adjusted goodwill on excess earnings
• Cost of replacement of assets
• Market value of a comparable listed company
• Present value of cash flows after tax
• Calculated on the basis of a price-earnings multiple of a comparable company
  

The most important phase for the qualification of the offer price is the test of reasonableness. One has to ask if the value ascertained appropriately reflects the company, the level of risk attached and the expected future returns. The value thus determined should not be too optimistic, a level that could distort the true value of the business. In the end, the price agreed should be realistic and sensible.