How is Valuation Used in Different Contexts?

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Published Date:  04-02-2024   Author:   diksha-shastri
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Imagine being in a dense forest and getting lost. The first thing you will do is pull out your phone and check the maps for directions. This will help you move forward and reach your destination. Similarly, in the world of business dynamics, valuation acts like your maps. It will show you where you stand, and your destination, and also a way to reach it securely. With so many different ways that valuation can help in growing a business, it is really important to know the real scope of valuation. Moreover, it is also vital that business owners from different industries understand the applicability of valuation in their industry. This will help in accelerating business growth. Hence, let’s get into the depths of how valuation is useful in many different contexts through this blogpost. 

First things first, the process of valuation is related to figuring out the worth of an asset. This asset may be tangible, intangible, or also a group of assets. People running a business will always be interested in knowing where they stand, and how much they own. The process of valuation helps in deciphering just that. Now that we have an idea of the meaning of valuation, let’s dive into the deep waters of discussing its scope and applicability. 

Application of valuation in diverse industries

The applicability of the valuation process is not limited to interpreting the financial statements of a business. It’s applicability covers so much more than that. Especially when you consider the fact that there are many diverse industries and businesses that can benefit from valuation. The table below gives a brief idea of the certain industries and how to benefit from the valuation of those industries:

Industry Application of valuation
Manufacturing Knowing the value of production machinery and the goods produced
Technology Protecting various intellectual property rights
Healthcare Assessing the value of equipments, patent for medicines, and medical techniques
Retail  Evaluating the inventory, and intellectual property rights, and assessing the store value
Energy Knowing the value of machines, assets, power plants, solar panels, and more.

Also Read: What Are the Different Methods of Valuation?

How to utilize valuation in financial planning?

No matter which industry your business is in, valuation can always be used to plan your finances. Moreover, even if you are not a business owner or have nothing to do with business, valuation is still applicable to you for individual financial planning. There are so many areas of personal life where the use of valuation helps in becoming a great planner. Some of the most fundamental ones are:

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Planning Investments

It is a trend where angel and venture investors invest heartily in many startups from different industries. As someone who will invest in a company or stocks, or even as a startup owner, it is vital to know accurate valuation of the business. Besides, the term investment is not only related to business, but also real estate, and any other asset or thing you buy. Moreover, valuation will assist you in deriving the fair market price or worth of your investment.

Decisions Related to Retirement

Superannuation or retirement. These terms are scary if you don’t follow the habit of saving your finances. Moreover, when you retire is finally the time that you get to reap the benefits of your hard work. So, careful consideration in this matter is required. By getting a valuation of your personal assets at a young age, and with timely intervals, you can create a safe and secure plan for your retirement. 

Succession Matters

After one person dies or passes away, their wealth is transferred to family members. This process of transferring the wealth of a deceased is called succession. The matters of succession include drafting will, registration of will, and more, etc. Hence, whenever in life, you decide to draw your will, ideally, you should get to know the value of your assets first.

Contribution of valuation in mergers and acquisitions

The process of valuation is deeply rooted in the business dealings related to mergers and acquisitions. The contextual  purpose that valuation serves in mergers and acquisitions is in the pre-, during, and post-stages. You can use the valuation reports for the business to make the entire process of merger or acquisition seamless. Let’s see how: 

Pre – Merger Due Diligence 

One of the most vital requirements to get a successful merger or acquisition is knowledge. Information is the key to making your business partnership or takeover easy and effective. Due Diligence is the tool that helps in figuring out the hidden risks and pitfalls of a business. Effective due diligence will provide you with plenty of power in the form of knowledge. Since the due diligence of a company must cover all the bases of that company, it also gives you a clear look at the financial statements. So, before you decide to enter into an M&A deal, the due diligence will show you the overall health and potential of a company and valuation will make the due diligence even more effective by showing the accurate financial health of the overall business. 

Negotiation in Deal

M&A proceedings need a strong hand in negotiations. Knowing the fair market value of a company you are desirous of acquiring, will definitely make the process of negotiation much easier and effective for you. 

The After-Effects and Integration

The valuation will create a reference point for the acquiring company to start the newly formed entity post-merger. This will help in monitoring the performance of all employees and even the company as a whole. Simply put, knowing the past numbers of a business will help you in increasing those numbers post-merger integration. 

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Scope of Valuation: Real Estate and Investments

After talking about the business aspects of the scope of valuation, let’s take a deeper dive into the waters of the role of valuation in the real estate and investment sectors. As seen above, when it comes to financial planning, valuation will not only help businesses but also individuals in assessing their wealth. Keeping that in mind, let’s move on to understanding the role of valuation in real estate and investment sectors, one at a time. 

How does valuation contribute to the Real Estate sector? 

Property has to be one of the most important tangible assets to exist. Dealings in the real estate sector usually bring out a lot of complexities. Hence, the accurate fair market value of the properties and the current value, etc are very crucial for sale and purchase. Let’s see how valuation contributes to the real estate sector.

Real Estate Sector  Role of Valuation
Property Listing and Pricing  Valuation will help in determining the real and fair price of a property or a piece of land. It will take all important factors into consideration and provide a Win – Win result for all stakeholders. 
Market Research It will not only show you the fair pricing for your property, but will help in assessing the real estate market as a whole. This will facilitate taking well informed decisions. 
Financial Loans Properties are quite commonly used as collateral against loans by various lenders. So, an accurate valuation will help in deciphering the lending amount, and rate of interest on collateral, etc. 
Taxation Matters Property Taxes are again, very complex matters to deal with. So, local authorities and governmental bodies usually rely on property valuation for assessing the amount of tax payable by its owner. 

How does valuation contribute to the investment sector?

Investment is one of the most popular modes of generating a second income for all individuals these days. However, before investing, it is vital that the individual is aware of the market practices, rates, and the true value of their investment. So, through this table, let’s unlock the ways in which valuation contributes to the investment sector for individuals.

Investment Matters Role of Valuation
Calculating Risks Valuation will show you the true picture of anything that you are going to invest in. This includes its pitfalls and potential risks. So, when you get valuation before making an investment, it allows you to carefully assess all the risks related to that investment. 
Diversified Portfolio Investors usually opt to build a diverse and varied portfolio. Usually, investors will achieve this by making various different investments. 
Selecting Stocks People that usually invest in stocks are using common valuation techniques to make well informed choices about the stock they want to invest in. 
Exit Strategy Investors want to exit an investment when they reach the peak profit gaining ratio. So, valuation acts as a catalyst in figuring out the right time to exit an investment. 

Also Read: Why is Valuation Important?

The Impact of Valuation on Taxation

Valuation has a very deep and significant impact on taxation, no matter which sector or business it is in relation with. It is equally impactful for businesses, assets and individuals. Let’s see its impact in brief through this table:

Aspect of Taxation Impact of Valuation
Property Tax Local and regulatory authorities rely on the value of property to determine the tax applicable. 
Gift Tax When you receive a gift exceeding a certain amount, gift tax might be payable. Valuation can help in determining your tax obligations. 
Income Tax The duty to pay all income taxes with complete fairness equally exists for individuals and businesses. When you are aware of the true value, you can easily decipher the tax you need to pay and the amount you are going to save. 
Charitable Contributions Donations to trust, etc are tax deductibles. So, if you are donating any asset, its valuation will help in determining the appropriate tax deduction you can seek. 

Conclusion

To conclude, the scope of valuation covers a wide range of different industries. Moreover, it also contributes very highly to many aspects of managing personal and business finance. As it is evident, the process of valuation is a tool that serves many purposes in different context, so is it possible for a single mode of valuation to cover all these dimensions? The answer is clearly a straight no. Because, even without considering your industry, your specific needs will always differ from the person next to you. So, considering the purpose of valuation, you can choose a combination of different methods, customize them, and then use them at your perusal.

Moreover, when you are customizing the process of your valuation, it will not only show you the real picture but also help you in moving forward by taking up well informed decisions, for your personal as well as professional aspects of life. In this blog, we have covered many areas and different contexts where valuation is useful. However, there are many other ways and different contexts in which you can use valuation. Reach out to experts before making any decisions related to valuation.

Also Read: What is Valuation?

FAQs

  • Is valuation important for all types of companies?

Yes, valuation is important for all different types of companies. Based on your industry, the specific use and scope of valuation may differ. However, that does not eliminate its need. 

  • Is valuation important in insurance?

Yes, valuation is a very integral aspect of insurance. Whether you are a business owner or any individual, getting a valuation before seeking insurance will help you in figuring out the appropriate coverage. This, in turn, will help in determining the premium, and will also help out in underwriting.

  • Can one mode of valuation suit all my needs?

No, following only one mode of valuation will not suit all your needs that are covered here. There are different approaches to valuation such as income approach, market approach, comps method, etc. So you will have to get all the necessary data and make a wise decision to get a valuation. 

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Diksha Shastri

Diksha is a seasoned writer of all things Law, Finance and Business. She aims to make things easy for the readers.

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