People often confuse the valuation of a business and the valuation of a company. So what is the difference?
The valuation of a business is really an assessment of what the business would sell for on the open market – at any given point in time.
The valuation of a company is totally different. The valuation of a company includes the assets and liabilities, and may approach the assessment of the ‘goodwill’ owned by the company in a different way to the way goodwill is assessed when selling a business.
For example; a transport business showing (adjusted) average earnings (profit) of $350,000 a year and with assets of $1,000,000 my sell for $1,250,000 – so that is the business value. But the company may have assets of $1,000,000 and liabilities of $900,000 – so the company may only be worth $100,000. The difference between to two valuations is quite large.
Even experienced professionals such as lawyers and bank managers can confuse the two approaches. Often when engaged to provide a valuation for the Family Court, or a partnership dissolution there can be a significant misunderstanding between all parties as to how the valuation should be approached.