How to Make Sure a Business Is Valued Correctly During a Merger

Mergers are major undertakings for businesses, and they can involve considerable financial investment and risk. One of the most crucial aspects of a successful merger is ensuring that both companies involved are valued correctly. A proper valuation helps determine fair exchange ratios, accurately assesses assets and liabilities, and ultimately determines the success of the merger. An experienced attorney can provide guidance on the steps that should be taken when performing a business valuation while also ensuring that all legal aspects of a merger will be handled correctly.

The Importance of Accurate Valuation

During a merger, accurate valuation is essential to ensure fairness and transparency between the merging entities. Here are some key reasons why a proper business valuation is crucial:

• Fair exchange ratios: The exchange ratio between the two merging companies directly impacts each shareholder’s ownership stake in the new entity. Accurate valuations help establish fair exchange ratios that satisfy all parties involved.
• Evaluation of assets: A comprehensive evaluation ensures that all tangible and intangible assets, such as property, equipment, intellectual property rights, and customer contracts or relationships held by both companies, are accounted for appropriately during the merger.
• Liability assessment: Determining liabilities like debts, pending lawsuits, or legal issues impacting either company’s value will help mitigate risks associated with inaccurate valuation — avoiding potential problems down the line.

The Methods Used in Business Valuation

Business valuation can be complex, but it typically involves the following commonly accepted methods:

• Market approach: This method relies on comparing the market values of similar businesses that have recently sold or been publicly traded. It analyzes factors like revenues, earnings multiples, and asset-based approaches to derive an accurate value based on comparable sales data.
• Income approach: With this method, the value of a business is measured based on its projected future income and cash flow. It considers factors such as anticipated growth rates, expected returns for investors, and risk profiles to estimate the company’s present and future value.
• Asset-based approach: This method values a business by considering its net asset value (NAV), which is calculated by subtracting total liabilities from total assets. The asset-based approach can be useful when valuing companies with significant tangible assets or those that are experiencing financial distress.

A comprehensive valuation often involves using all three of these methods. This can provide information that helps establish an accurate overall value of the business. However, a proper valuation will require careful analysis of various data points unique to each company being valued.

The Role of Professionals in Business Valuation

Owners, partners, or shareholders of businesses involved in mergers can work with multiple types of professionals to ensure an objective and thorough valuation process. Financial professionals can assess all relevant issues when valuing a business, including financial statements, market research studies, assessments of industry trends, and comparable transactions to derive fair values accurately. At the same time, a legal professional can help perform due diligence and identify potential concerns that could affect a business in the future. 

At the Gierach Law Firm, we can provide invaluable legal support during a merger. We can work closely with accountants or other financial experts to make sure a business will be valued properly while addressing any other issues that may arise during a transaction.

Contact Our DuPage County Mergers and Acquisitions Attorney

If you are planning a merger or acquisition, and you need to ensure that valuations will be performed correctly while addressing any other legal concerns, the Gierach Law Firm can provide invaluable guidance and effective representation. Our Naperville business merger lawyer has extensive experience with mergers and acquisitions. We can provide comprehensive legal help with all aspects of a transaction, guiding you through valuation, contract negotiations, and other aspects of a merger to ensure a successful outcome. Contact us at 630-756-1160 to schedule a consultation and learn more about our legal services.