A business valuation may be required for a variety of reasons, such as when considering a purchase merger or divestment, to assist in succession planning, dispute resolution, debt or capital raising, or for financial and tax planning purposes. A business valuation is a process used to estimate the economic value of a business, as well as the tangible and intangible assets that also form part of that business. It provides an estimate for the value of:
• Entire Businesses
• Tangible assets such as buildings, plant and equipment
• Financial and intangible assets and liabilities, including, contracts, brands, market share/ position and intellectual property
• Securities, including, debt, equity, derivatives and hybrid securities.
A business valuation is not just for business owners who are preparing for a sale. Whilst this is usually the most common reason, there are numerous other business and legal situations that require, or can benefit greatly from a detailed business valuation. Such as:
• Judicial authorities can often require a business valuation for legal matters such as shareholder disputes, divorce settlements or breach of contract disputes.
• Lending authorities are now increasingly requiring business valuations when business owners are applying for loans or refinancing.
• A detailed valuation can help identify what is needed to increase the value of the business or attract new capital.
• Prospective business purchasers place more credibility on a valuation if it is performed by an independent third-party.
Detailed business valuations not only assist business owners in determining the value of their business, they also help them maximise value when considering a sale, merger or partnership. A sound business valuation can become part of the actual buy/sell agreement.
Business owners can also use a business valuation as one of the cornerstones of a long-term financial plan to enhance the value of their business, helping them to better develop a strategic business plan.
There are some important points to remember when getting your business valued by a third party. Make sure the valuer does the following:
Uses the appropriate valuation method – there are a variety out there, the method selected should best suit the purpose of the valuation and the unique circumstances of the business and its assets. It is recommended that the original valuation be cross-checked with a secondary approach to make sure it is reasonable.
Focuses on expected earnings – the value of the business is dependant on expected earnings in the future. Past earnings are only relevant when calculating this expected figure.
Uses realistic growth rates – the valuer should use common sense and not be too modest or too positive when it comes to forecasting growth rates.
Doesn’t overstate intangible asset values – such as brand names, databases and customer contracts and relationships. These valuations may be required at the point of initial recognition following an acquisition, or when renewing the carrying value for impairment testing purposes. Avoid double counting of overstatement of values by recognising the earnings contribution made by other assets.
There are a lot of easy mistakes business valuers make, however here at The Quinn Group our experienced team of accountants and lawyers can help value your business correctly. For more information on business valuation submit an online enquiry or call us in 1300 QUINNS (784 667) or on +61 2 9223 9166 to book an appointment.