Business valuation is a complex process and requires expert assessment and many different approaches. In spite of experts adapting a combination of methods, there are times when it becomes very complicated to accept their conclusions and both the buyer and seller, or one of them may disagree with the same. There are many aspects that may affect the values as these may change with time and change in perspectives. Value of a business changes with time, the person evaluating it and the purpose of evaluation.
Personal and professional assets
It is always easy to assess a large corporation. They have a certain share value, reputation, and a brand value. Most of the personal and professional assets are distinct and can be easily assessed separately and they have a history of records or financial records that can be easily verified. In a small family company or in startups the situation is completely opposite and it is very complicated to differentiate between the assets and the present and future loyalty and brand value. In a startup especially, past records may not be available, and that makes the valuation for future very difficult and based on assumed sales and revenues.
In many take-oversaw sale processes, a clause of non-competition added. This may become a bone of contention and some of the problems may include:
- When the current business has a certain amount of goodwill and the seller joins a new business after selling the original one then the loyal customers may also migrate with him. No one wants to buy a business in such conditions.
- The seller may start a new enterprise and use his old recipes or programs or take away the loyal clientele by badmouthing the buyers.
To prevent such a scenario, a non- competition clause is added to the agreement that may change the valuation process and the ultimate price of the company. This may forbid the seller from starting a similar business in the same area. Alternatively, a time period of some years may be prescribed before which the new business can be started.
Apart from this concept, discounts are considered for various factors like for lack of control, lack of marketability etc. On the other hand, there are times when premiums are paid for acquiring a bigger control. The valuation depends upon many such factors and that can be understood and applied only by experienced professional evaluators.The buyer can decide, the method that he would like to use. He can also decide the other factors that he is ready to accept that help to decide the final price of the company.