Thereisaroleforvaluationateverystageofafirm’s life
cycle.Forsmallprivatebusinessesthinkingaboutexpanding,
valuationplaysakeyrolewhentheyapproachventurecapital
andprivateequityinvestorsformorecapital.Theshareofa
firmthataventurecapitalistwilldemandinexchangefora
capitalinfusionwilldependonthevalueheorsheestimates
forthefirm.As thecompanies getlargerand decideto go
public, valuations determine the prices at which they are
offeredtothemarketinthepublicoffering.Onceestablished,
decisionsonwheretoinvest,howmuchtoborrow,andhow
muchtoreturnto theownerswillallbe decisionsthatare
affectedbyvaluation.Iftheobjectiveincorporatefinanceis
to maximize firm value,
6 the relationships among financial decisions, corporate
strategy, and firm value have to be delineated.
Asafinalnote,valueenhancementhasbecomethemantraof
management consultants and CEOs who want to keep
stockholders happy, and doing it right requires an
understandingoftheleversofvalue.Infact,manyconsulting
firms have come up with their own measures of
value—economicvalueadded(EVA)andcashflowreturnon
investment (CFROI), for instance—that they contend
facilitate value enhancement.
Valuation for Legal and Tax Purposes
Mundanethoughitmayseem,mostvaluations,especiallyof
private companies, are done for legal or tax reasons. A
partnershiphastobevaluedwheneveranewpartneristaken
onoranoldoneretires,andbusinessesthatarejointlyowned
have to be valued when the owners decide to break up.
Businesseshavetobevaluedforestatetaxpurposeswhenthe