When businesses are being valued, it is usually the entire enterprise value that is sought. You will generally see such valuations if the company is offered for sale, a transfer of ownership is contemplated, or for investment purposes, whether debt or equity.
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 a single division is to be spun off from the parent company. Here, the owners will likely be interested in the value of just that segment and not the entire business.
Valuing a part of the company presents a set of challenges. A key question you are likely to face is whether the business is organized into well defined business units. If so, business income and expenses can be attributed to each business unit as if it were a separate company.
Even then there are some differences between a truly independent firm and a business segment managed as a separate profit and loss center. Chances are the business units have access to central company resources on special terms. For example, the parent company may be helping with supplier negotiations or offer a central research and development function for the business units to use. Or perhaps the 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. If the business unit is to be valued on a standalone company basis, you would need to adjust the income and expenses accordingly.
This is 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.
In summary, a business unit can be valued 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.