DUE DILIGENCE: COMPANY EVALUATION

How does one undertake a company evaluation?

Company evaluation is the complex activity that is carried out in order to estimate the economic value of a company, since the balance sheet is not always sufficient to obtain the data needed to carry out this evaluation.

As can be imagined, the estimation process is highly complex, in fact one needs to search for all the corporate information necessary to find the economic data also connected to the market. Usually the company is evaluated in the case of the sale of shares, in cases of merger and acquisition of a company, in capital increase transactions, or liquidation or even in cases of withdrawal of a shareholder.

In this complex dynamic, it is important to note that the evaluation to be carried out will be strictly dependent on the subjective position of the person who has requested it and to the objective; for example, in the case of company transfer, there will be different positions if the evaluation is requested by the seller or by the buyer.

There are various methods of evaluation, for example, the equity method that identifies the value of the company in connection with the assets, or the income method that is based on the company’s ability to generate income. Certain times it will be necessary to use both methods or even to refer to other methods, which is why an activity that may seem very simple actually consists of multiple inter-connected variables that have to be analyzed by the appointed expert.

In regard to the position of the expert, it is important to emphasize how fundamental his neutral role is with respect to the positions of the parties.

In conclusion, one must not confuse what the value of the company is with what may then be the price (for example in the case of transfer of a company), which will be the end result of the determination and a long negotiation process between the seller and buyer, based on the data that emerged following the company evaluation.

If you are seeking for more information on Company Law, contact one of our lawyers, by filling out the form below