Throughout its life cycle, a business will inevitably face significant transactions, such as an acquisition, sale, transfer, merger, or even a shareholder dispute or divorce. Business valuation is crucial in determining the fair market value of the business. It also helps in understanding the issues, risks, and opportunities associated with the transaction, serving as a foundation for negotiations between the parties.
According to the Canada Revenue Agency, the fair market value of a business is defined as the highest price that can be obtained in an open and unrestricted market between an informed, knowledgeable buyer and seller, each acting independently.
WHAT IS THE DIFFERENCE BETWEEN A BUSINESS VALUATION AND A
BUSINESS TRANSACTION
Understanding the difference between a business valuation and a business transaction is important. A valuation provides a snapshot of the fair market value of a business at a given date, whereas a transaction is defined by a price and conditions.
Business valuation also helps to understand the various elements that compose the value of the business: its revenues, expenses, profitability, assets and liabilities, fixed assets, liquidity needs to ensure business operations, financial ratios, and its capacity to support the financing of a transaction.
MASTERING THE CRAFT OF CLOSING SUCCESSFUL TRANSACTIONS
The art of closing a successful transaction lies in the ability to translate and reconcile the interests of stakeholders and their strategic issues (human, commercial, operational, technological, and financial), as well as the fiscal, legal, and financial aspects of the transaction to their satisfaction.
Valuation, used to simulate scenarios, plays a crucial role in assessing a transaction’s capacity to secure financing, including financing structure, equity investment, sale balance, interest rates, loan terms, and the diverse ratios lenders require. Additionally, valuation models anticipated strategies and synergies (value creation) for the acquiring party and serves as a guide and tax planning tool for the seller. Ultimately, whether one is a seller, buyer, or successor, valuation remains pivotal in determining the transaction’s terms and pricing.
