|Valuing a business or assets may become necessary or beneficial at any time, but it is particularly important when buying or selling.
So what is valuation all about? Is a valuation worth anything? How do we determine value and is it possible to do so on an objective basis?
Let’s look at how the value of anything is normally determined, and at the difficulty of measuring it in an objective sense both generally and in certain specific circumstances.
Banksy’s “Girl with Balloon” and Bitcoin illustrate…
Recently the artist Banksy put up for auction a work called “Girl with Balloon”. It was sold for GBP860,000. No sooner had it been sold than it began to shred (Banksy had put a shredder in the frame). Halfway through the shredder got stuck.
Paradoxically Girl with Red Balloon is now worth double the price it fetched.
So how do we determine value?
In the bond market and stock markets value is determined by millions of people interacting to buy bonds or stocks. Valuations thus change by the second. Analysts use a variety of methods to value, say, shares and send out notes to their clients recommending certain shares to be undervalued and thus worth acquiring. However, there is uncertainty in this.
When we decide to sell our business either our accountant or business broker will value the business. A variety of techniques are used such as discounted cash flow, net asset value, comparative analysis of business competitors etc to arrive at a value. Of course in practice your business may be sold for a higher or lower amount than the valuation.
Finally, Bitcoin got to just under $20,000 last year but is now struggling to maintain a value of $4,000. Its loss of nearly 80% of its value puts it in bubble territory, and as a pioneer in cryptocurrencies it is virtually impossible to value.
What does all this mean?
It should also be pointed out that the work that analysts and business brokers do is worthwhile (after all they are repeatedly asked to perform valuations), but each one of us looks at assets in our own unique way and we see value differently from the next person, illustrating how difficult it is to determine value objectively.
Valuations are in reality merely trying to establish a point whereby sellers and buyer can start to negotiate.