Valuing a single segment of a business

When you value a business, you usually focus on valuation of the entire enterprise. For example, you will generally see such valuations if the owners put the company up for sale. In addition, business valuation comes up when the owners consider a transfer of ownership, or for investment purposes, whether debt or equity.

Valuing a specific business segment

You may wonder: are all business appraisals done on the total business enterprise basis? Not necessarily. Consider a situation when business owners want to divest of part of the business. Perhaps they decide to spin off a single division from the parent company. Here, the owners will likely want to know the value of just that segment and not the entire business.

Challenges with business unit valuation

Valuing a part of the company presents a set of challenges. A key question you need to address: is the business organized into well defined business units. If so, you can attribute business income and expenses to each business unit as if it were a separate company.

Even then you run across some differences between a truly independent firm and a business segment managed as a separate profit and loss center. Importantly, business units often have access to central company resources on special terms. For example, the parent company may be helping with supplier negotiations. Or it may offer a central research and development function for the business units to use. Perhaps a business unit takes advantage of the central corporate marketing organization in order to gain access to certain market segments.

To make your business segment valuation realistic, you will need to identify all such special arrangements and economic advantages they offer. Let’s say you want to value a business unit on a standalone company basis. Then you would need to adjust the income and expenses accordingly.

This looks similar to situations when an independent company enjoys some special arrangements that you do not expect to continue past the valuation. For example, the firm may be leasing its premises from its current owners on terms that will not continue once the company sells. In this case, you would need to adjust the rental expense to market which will affect the available cash flow and, in turn, business value.

The takeaway on business segment valuation

In summary, you can value a business unit successfully as long as you can realistically attribute its income and expenses. In addition, you would need to make a judgment call as to the business risk once the business unit starts operating as an independent entity.

See Valuation Tour