What Is Valuation?

Valuation is the process of determining the value of a company or an asset. What does the value of a company then mean? Well, basically it is the intrinsic or true value of that particular business. If this company would be sold without any negotiations or premiums, this intrinsic value would be the price both parties would agree on.

In many cases it is hard or even impossible to explicitly state the value as it is something that depends on the observer. Let’s use an illustrative example. For one person, the monetary value of an iPhone might be €500 whereas for another, an Apple fan, the value might be €800. The value of a product is thus case sensitive, and so is the value of a company. It means that for example the value of a target of an acquisition can differ between companies. This means that some companies benefit more from certain businesses than others. The deviation between values is a result of differences in future prospects, that can stem from e.g. synergies.

Price is the monetary value of a company or an asset the buyer must pay to acquire it. Price is not case sensitive or at least not as case sensitive as value. For example, if somebody wants to buy an iPhone, the price is €750 regardless of the persons perception of the iPhone’s value. In e.g. acquisitions, the valuation process is the initial phase in which the value is determined. It is followed by negotiations to determine the final price. As the value should exceed the price paid, an accurate valuation is important.

Valuation is the process of determining the intrinsic value of a company. Intrinsic value is the underlying ‘true’ value of a company and it is not affected by observer’s background or situation. Company’s intrinsic value can be used as a start point in business negotiations.

This video explains well how to value a business. If you wish to learn more about our valuation, the easiest way is to try our tool. Click here for the free trial.