An accurate evaluation for financial security

Why you need to know the real value of your business

Posted by
Anuța Stan

Most business owners turn to a valuation of the company only to cover an immediate need – when they want to sell or when one of the shareholders wants to leave the company.

But a valuation of the business can be the safety code, including for preventing borderline situations faced by many Romanian companies that do not know the real value of the business they own, more than 100,000 of them going into insolvency in the last five years and only 3% managing to successfully reorganize, according to statistics.

Annuta Stan, an authorised valuator with over 24 years of experience, comes up with some essential advice for companies that always consider prevention policies to maintain a healthy long-term professional climate.

Revaluation of assets and liabilities every three years

The updated value of the assets is an important indication for a possible decision by the owners to reinvest part of the profit for the acquisition of new assets or for their reconditioning, and the market value of the debts may influence the decision to refinance or reschedule them.

In annual or half-yearly financial statements, the book value of assets and liabilities may differ from their market value.

As a result, the company's equity market value may differ from that specified in the balance sheet.

Thus, shareholders or associates do not have a clear and real picture of the real value of the business they own. In addition, by corroborating the value of assets with other parameters such as strengths compared to competitors, future opportunities or competition in the market, owners can obtain valuable information on the company's up-to-date situation.

According to the International Financial Reporting Standards – IRFS, it is recommended that each company re-evaluate its assets, at least every 3 years, to have their assets fair value reflected in their financial statements.

With the change in legislation in January 2016, the valuators draw up two separate reports: the one for estimating the fair value of assets held and the one for estimating the taxable value of buildings owned.

It is good to know that the methodology for estimating the taxable value is different from that used to estimate the fair value. For example, in the case of valuation for the determination of the taxable value, only buildings are  evaluated and the cost approach takes precedence.

SWOT analysis of the company

By identifying strengths and weaknesses, opportunities and risks, owners can find out the company's up-to-date situation.

A professionally executed valuation helps decision-makers understand and take into account all aspects that can influence the progress of the business.

Once known, strengths and opportunities can be accentuated and weaknesses and threats can be mitigated well before the business sale process begins, with increased chances of getting the best price.

A detailed x-ray of the business can be carried out within the diagnostic analysis, an important step in the valuation process.

This analysis can extend to the company's legal situation, to human resources and management,the operational and commercial activity shall be analyzed, and within the financial diagnosis the performance achieved by the company over the last 3-5 years and identifies potential risks shall be centralized.

The fundamental objective of any company is profit, which implies a higher profitability, but also ensuring liquidity, solvency and financial balance.

All of these indicators, which reflect the financial position of the company, are calculated and interpreted by the business valuation professional within the evaluation report.

Moreover, the financial analysis of the company is the step leading up to the application of the valuation methodology, regardless of the approach chosen.

Co-opting of valuators in the merger and acquisition procedure

Valuation is an essential element proceedings preceding a business combination (mergers and acquisitions).

In a first stage of a merger, whether by absorption or by merger, it is necessary to revaluate the assets of the companies concerned, carried out by valuators with appropriate professional qualifications.

On the basis of the results of the previous valuation, the value of the assets and liabilities of the companies shall be adjusted, the balance sheets of the merger shall be drawn up and the net assets at the merger shall be determined.

In a third stage of the merger by absorption, the net contribution by the overall assessment of the companies involved shall be determined.

It is therefore important that the merger or acquisition preparation team be co-opted and authorised valuators who understand that a business is an entity directly influenced by external economic factors, and knowing the value of the business means understanding its place in the market.


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