Determining the value of a company is anything but straightforward. There is no such thing as an objectively ascertainable enterprise value, and sellers and buyers often have very different ideas of what a company is worth. The current owner, often the entrepreneur, will mainly look to the past. His or her subjective enterprise value will factor in all of the time, work and capital that went into making the business what it is at the time of the transaction. So the seller’s enterprise value has an emotional component. As a result, it is usually much higher than the value to the buyer, who will naturally see things from a different perspective. A buyer undertaking a business valuation is mainly interested in the future of the company and the business opportunities it will bring. His or her focus will be on the income that the company will generate in the future and how he or she can refinance the purchase price.
In situations like this, an independent business valuation carried out by a neutral certified public accountant helps establish common ground. The accountant prepares a valuation report as the basis for purchase price negotiations. While there are no legally binding rules for ascertaining enterprise value, there are a number of established valuation methods that can be used to determine an enterprise value which is fair to both seller and buyer. A purchase price is ultimately the result of negotiations between buyer and seller, that is to say a product of supply and demand.