Why Value a Business and the Information Needed

What is a business worth? For a company whose shares are quoted on an exchange, the market gives an answer every day: the share price times the number of shares. For a private company there is no such price. Yet someone must decide what to pay, or what to accept, when a company is sold, merged, floated or inherited.

Even for a quoted company, the market price is not the whole story: a bidder who wants control will pay more than the market price, because control, and the changes it can bring, are worth more than a small holding. A valuation is therefore not a single number discovered like the temperature, but an estimate built from assumptions, for a particular purpose and a particular buyer or seller.

This topic opens the study of business valuations.

It explains why businesses are valued (takeovers, flotations, private sales, mergers and other purposes), the difference between value and price, the range within which a deal can be struck and the value of synergies, the three broad approaches (asset-based, market-based and cash-flow-based), the information that a valuer needs and how to adjust profits to a maintainable level, and the Nigerian rules on takeovers, with worked examples. The next topic covers asset-based valuation.

The syllabus asks candidates to estimate the value of a business using several methods and to explain the assumptions of each. Read small and medium-sized enterprise finance: venture capital, angels, crowdfunding and supply chain finance first.

Why value a business

Quoted companies

A quoted company already has a valuation: the market price of its shares. The main reason to value it again is a takeover bid. The bidder always offers more than the market price, because shareholders will not sell control at the market price. It needs a valuation to decide a fair price, and above all the maximum price it can pay and still gain.

That value can differ widely depending on what the bidder plans to do with the target after the takeover (cutting costs, combining operations, selling parts, using its assets better).

Unquoted companies

• Flotation: when a private company converts to a public company and comes to the market, an issue price must be set.
• Private sale of shares: buyer and seller must agree a price; the buyer decides the highest price he will pay and the seller the lowest he will accept.
• Mergers of unquoted companies: values are needed to set the terms (the exchange ratio).
• Other purposes: a shareholder who dissents from a takeover and applies to the court for fair value; the buy-back of shares; security for a loan; the settlement of a dispute or an estate; the reporting of an investment or an acquisition in financial statements.

Value, price and the bargaining range

Value depends on who is valuing and why; price is what is agreed. A target’s shares trade at ₦6.00 and it has 200m shares: the market values the company at ₦1,200m. A bidder offers a premium of 30%, ₦7.80 a share, or ₦1,560m. Why is that rational?

Because the bidder expects synergies: extra value from combining the businesses (savings in costs, higher sales, better use of assets), which it estimates at a present value of ₦400m. The most it can pay and still not lose is the stand-alone value plus the synergies: 1,200 + 400 = ₦1,600m.

At a price of ₦1,560m the bidder gains only ₦40m of the synergies and the target’s shareholders gain ₦360m (the premium); the total gain of ₦400m is shared according to the price.

If the target’s directors think the company is worth at least ₦1,300m and the bidder will pay at most ₦1,600m, the bargaining range is ₦300m, and negotiation decides where in it the price falls (₦1,450m would split the gain equally). The only “correct” valuation is the price the bidder offers and the target’s shareholders accept.

The three approaches

1. Asset-based: value the net assets (book value, net realisable value or replacement cost). It gives a minimum or floor, because it ignores goodwill and the earning power of the business (the next topic).
2. Market-based: value the earnings or dividends using multiples or yields from comparable companies: the price/earnings ratio, earnings yield, dividend yield and dividend valuation models (the following topics).
3. Cash-flow-based: discount the expected future cash flows of the business at an appropriate rate, or value it by economic value added (a later topic).

All the methods have a rational basis, but each gives a different answer, because each depends on different estimates. In an examination you may be asked to use several, discuss their assumptions, compare the results and recommend a value or an offer price with reasons.

The information needed

A valuer needs reliable information, and checks it through due diligence, the investigation of the target before a deal:

• Financial: audited financial statements for several years, management accounts, the quality of earnings, cash flow, working capital, debt and commitments, contingent liabilities.
• Forecasts: the target’s business plan and cash-flow forecasts with the assumptions behind them.
• Market and industry: the target’s market position, competitors, customers, growth and risks; comparable companies and transactions for multiples.
• Operational and people: management quality, key staff, contracts, supply chain, systems.
• Legal and tax: ownership of assets, litigation, licences, tax compliance, regulation.
• Asset values: market values of property and plant, valuers’ reports.

Adjusting profits to a maintainable level

Reported profit often needs adjustment before it is multiplied by a ratio. A private company reports earnings of ₦90m, but the owner-manager pays himself ₦30m where a replacement manager would cost ₦18m (add back ₦12m). There was a one-off gain of ₦8m on the sale of a property (deduct) and a one-off restructuring cost of ₦5m (add back). The maintainable earnings are 90 + 12 − 8 + 5 = ₦99m.

At a price/earnings ratio of 8 the value is ₦792m, compared with ₦720m on unadjusted earnings: the adjustments are worth ₦72m. The valuer must also adjust for a different tax position, related-party transactions at non-market prices, and abnormal items.

Takeovers and valuation in Nigeria

• Under the Investments and Securities Act 2025 and the rules of the Securities and Exchange Commission, a person who acquires 30% or more of the voting rights of a public company must make a mandatory takeover offer to the remaining shareholders. No takeover bid, mandatory or voluntary, may proceed without the Commission’s authority to proceed. One mandatory offer in 2026 was made at a premium of about 25% to the market price.
• There is no statutory minimum price for a takeover; prices are normally negotiated, except where a court determines fair value for a dissenting shareholder.
• Where shares are offered as consideration a prospectus approved by the Commission is needed, and schemes of arrangement under the Companies and Allied Matters Act 2020 (sections 715 to 717) require full disclosure, valuation reports and independent expert opinions to be given to shareholders.
• Mergers may also need clearance under the Federal Competition and Consumer Protection Act 2018.

The ideas in more depth

Why the bidder pays a premium

A bidder pays for control: the right to change the company’s strategy, management and finances. If it expects to make the company worth more than the market now values it, shareholders of the target will insist on a share of that gain. The premium is how they get it.

The danger for the bidder is paying away all the synergies (or more) and so destroying value, the “winner’s curse”. A disciplined bidder sets its maximum before it negotiates and walks away if the price exceeds it.

Why several methods are used

Asset values ignore earning power; earnings multiples depend on comparable companies that may not be comparable; discounted cash flow depends on forecasts and the discount rate.

Each has a weakness that another does not, so a careful valuer gives a range and explains which method fits the company: asset-based for a property or investment company, earnings multiples for a stable trading company, discounted cash flow for a company with a clear forecast of cash flows or with large investments ahead.

Sources and references

• The Investments and Securities Act 2025 (including the mandatory takeover provision) and the Securities and Exchange Commission Rules and Regulations; the Companies and Allied Matters Act 2020; the Federal Competition and Consumer Protection Act 2018. International Financial Reporting Standard (IFRS) 3 Business Combinations and IFRS 13 Fair Value Measurement are relevant to the reporting of an acquisition.

These points are stated as at 5 November 2026.

Worked examples

1. Maximum.
   1,200 + 400 = ₦1,600m.

1. Bidder.
   1,600 − 1,560 = ₦40m.
2. Target shareholders.
   1,560 − 1,200 = ₦360m.

1. Adjust.
   90 + 12 − 8 + 5 = ₦99m.

How to answer in the exam

• State the purpose of the valuation and who the valuer is acting for.
• Use more than one method and give a range, with the assumptions of each.
• Adjust earnings and assets for abnormal items before applying a method.
• Recommend a price in relation to the minimum and maximum, and justify it.

Common mistakes in the exam

• Presenting one valuation as the “true” value.
• Forgetting that a bidder must offer more than the market price.
• Ignoring synergies when setting the maximum price.
• Applying a multiple to unadjusted earnings.
• Using the asset value as the likely offer price instead of a floor.
• Leaving out the discussion of assumptions.

Quick revision

• Reasons: takeover, flotation, private sale, merger, legal and tax needs.
• Three approaches: asset-based, market-based, cash-flow-based.
• Maximum price = stand-alone value + synergies; the price is negotiated.
• Normalise profits; due diligence; 30% triggers a mandatory offer.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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