The Internal Rate of Return (IRR) is a valuable yardstick for comparing alternate business valuation proposals between which you must allocate funds. It would be naïve to use IRR alone for key investment decisions, but you can hardly optimize capital deployment without taking this parameter in to account. A project which does not meet your return objectives is unlikely to make up on qualitative or other aspects. You can also use this factor for negotiating, setting a transaction price which would give you the lowest acceptable IRR. It will also act as a reference point for merchant bankers and other people who scout for opportunities on your behalf.

People in favor of a particular project may not like the IRR approach because it can make their biases naked. However, this is all the more reason to make everyone involved in a project submit to the discipline of comparing alternatives on a level playing field. Opportunity costing as a corporate culture improves decision making, and your team will like it once they get used to the approach. Much of business valuation becomes mechanical through such a system, leaving you free to mull over the strategic considerations at sufficient length.

Business Valuation with Revalued Assets: Real estate and civil construction are almost invariably undervalued in business valuation. Land assets tend to appreciate, though inadequately maintained buildings may suffer the opposite fate. Either way, it is worth getting property agents and engineers to put new numbers on the fixed assets of a business. Furniture and fixtures are rarely material, unless there are some antiques involved, but new plant and machinery may cost much more than amounts in depreciation reserves. You cannot blame a seller for prevaricating on fresh investment to keep a business going, but a seller has to take them in to account to hold on to market share. The revaluation approach to business valuation has increased relevance in this age of globalization and new technologies.

Accounting based on written down values belongs to less turbulent times. Most books rely on tax rates of depreciation, which can exacerbate errors in business valuation. The effort to revalue all assets may not be worth the time and money involved in getting figures from independent experts, but the approach has value for the most strategic fixed assets deployed in an enterprise. The perspectives of buyers and sellers may differ on this axis, because of which some of the successful business valuation projects are ones in which a buyer sees hidden values in assets which a seller cannot realize.

It is not as though revaluation always leads to a treasure at the end of a rainbow. The exercise may show business valuation in negative light, because the operations are not economically feasible at current prices for the assets used. A buyer may still have good reasons to go ahead with purchase, but should be ready for the additional doses of capital influx which must follow.