Why should a target company be valued as a standalone business? Give examples of the types of adjustments that might have to be made if the target company is part of a larger company?

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The Answer is The valuation of the target firm on a standalone basis provides an estimate of the minimum price that might have to be paid to acquire the firm, assuming the market for such firms is efficient. Note that the notion of a minimum price does not preclude the buyer from buying the target firm at a discount from its true value. For example, the buyer may be able to acquire the target at a discount from its economic value if the seller is in a hurry to sell, the market for such businesses is highly illiquid, or the cost and risk associated with performing due diligence is high encouraging the prudent buyer to offer less than the target's intrinsic value. If the acquirer or target is part of a larger firm, the projected cash flows must be adjusted to reflect all costs and revenue associated with the acquirer's or target's operation. The failure to make the proper adjustments can result in an over-or-understatement of value. Such costs include all administrative expenses such as legal, tax, audit, benefits, and treasury functions that may be heavily subsidized by the parent. Moreover, intercompany revenues must be restated to reflect what they would have been if they had been valued at current market prices.

Why Should a Target Company Be Valued as a Standalone