Not everything that is valuable has a known price. Business valuation is the art and science of estimating the value of business interests for which there is no active market, and therefore no known price.
In its simplest form, the value of a business interest or other asset is the present value of all future benefits (or cash flows) of the business or asset. Analysts use a variety of financial and valuation tools to estimate the magnitude and risk of these future benefits, in theory simulating the decision-making processes of hypothetical willing buyers and sellers of the business interest or asset in question.
In general, individuals or companies can need independent valuation opinions whenever there are two or more parties with conflicting interests in value. Such situations often include:
- Tax Purposes
- Financial Reporting
- Transaction Advisory
- ESOPs and other equity compensation plans