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The role of company valuation in the process of resource allocation

Dawid STOLAREK
Corporate Finance Manager at RSM Poland

When planning an enterprise purchase or sale transaction, each of the parties is interested to know how much this enterprise is worth. If both the buyer and the seller are determined to conclude the agreement and their relations are based on mutual trust, they often decide to carry out only one valuation and entrust its preparation to an external and independent consultant. The outcome of such valuation is usually a single value,  achieved according to the fair value measurement standard.

If the two parties, however, fully approved the result of the valuation, it would be difficult to make the transaction on the terms and conditions that could be favorable for both. Perfectly equivalent exchange would not generate any additional benefits. And this, in turn, would have a negative effect on the activity of the capital market. A consistent opinion on the value of an enterprise leaves no room for negotiation between the parties to the transaction, which definitely hinders a successful closure of the transaction.

What really causes that contemporary market for corporate control is so active and abounds in numerous M&A transactions?

Individual company valuation as a catalyst for changes in economy

The most common factors that stimulate ownership changes are:

  • different perception of development perspectives and ability of an enterprise to generate cash;
  • possibility of implementing restructuring operations;
  • prospects for obtaining premium in the course of synergy with the assets the buyer already has.

All abovementioned situations show that reasonably operating entities, which become parties to a transaction, have their own and distinctive views on the value of the enterprise that is to be sold. Of course the buyer has to value the enterprise more that the seller. Having individual view on the value of an enterprise contributes to an increase in liquidity of economic resources and, thanks to better use of financial resources, leads to a boost of effectiveness and productivity of the whole economy. Professional valuation, prepared in compliance with the standards, serves as a good tool when making right business decisions.

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