Problems of Valuation
Problems of Valuation. When a business is transferred or its assets are sold, it is necessary for the parties involved in the transaction to agree upon the price to be paid. The decision on the price to be paid is often difficult to arrive at. The balance sheet surplus of assets over liabilities is the generally accepted guide to the price to be paid for the business as a going concern.
However, balance values are book values and are often unreliable.
The followings are the usual problems confronting one in the valuation of a firm:
- Balance sheet values of fixed assets may be wrong indicators, for they are generally based on a book value consideration. Changes in the actual value of assets are not incorporated in a balance sheet.
- The value of current assets may be reliable. But here again the amounts of debts, accounts receivables etc. may be unknown. Moreover, the inventory may not find a ready market.
Some assets may be highly specialized and may not have a ready market.
- The selling or break-up value and the buying or replacement value may become difficult and different of assessment.
- It may be difficult for a purchaser to estimate how much the possession of the seller’s assets would add to his profitability. The inflows have to be discounted not only for interest but also for risk.
- The value of goodwill may be greater to the buyer than the seller
So, these are the basic problems arise while making valuation of a firm.