What is my business / shares worth?
Every business owner would like to know the true current market value of their business. Unfortunately, no single quick "rule of thumb' will help determine the true value of a business. In fact business valuations are performed in order to take the guess work out of valuing the business.
Although there are additional adjustments applied to value shares of closely held businesses to account for levels of control & influence over business decisions & marketability of the particular parcel of shares, for the purposes of this we will use the term business valuation to include valuation of shares as well.
What is business valuation?
A valuation is a determination of the value of a business interest based on an analysis of the financial records of the organisation, the environment it operates within and the risk associated with that.
Simply put, a business appraisal is an opinion on the fair market value of a business (or a portion of it) - fair market value being the price at which a willing and able buyer would purchase a business from a willing and able seller, when both the parties are acting at arms-length in an open and unrestricted market with neither of whom are under any compulsion to buy or sell with both having reasonable knowledge of the relevant facts.
It is also important to point out that the valuation is that of the "current" state of play & not the "potential". Factoring in the "potential" almost always results in a buyer paying the seller the price for something that doesn't exist yet!
Why do I need it?
Businesses do not sell for a variety of reasons, but the most common reason is that they are inaccurately priced. The business broker of the seller typically arrives at an asking price using "rules of thumb". Although such rules of thumb can be useful, they alone cannot accurately determine a business's real value. No two businesses are alike; consequently, an independent analysis is required to determine the correct business value for each unique business at a certain point in time.
Business brokers estimate that businesses sell 35% faster with an independent expert valuation. Valuations ensure that accurate values are placed on businesses by using industry standard models with proven results and confirmed references to "sold transaction" databases that contain comparable transactions.
Other reasons could include marital settlements, insurance, periodic testing goodwill for impairment, part sales / purchase of shares in closely held companies and court ordered settlements.
What assets can be valued in a business?
Generally speaking, the assets in business can be viewed as individual assets, for example, if your business includes motor cars, delivery vans, production units or factories, each of these have a value based on age, operating conditions, level of technology, warranties, serviceability etc.. If you're looking to dispose / acquire an individual asset, you're better off looking for a dealer in those assets.
However, collectively, when these assets have been applied to generate a series of cashflows, the value of your business is the value of those cashflows in the face of factors like competition, products or services, levels of innovation, current customer database, to name a few.
What are the various types of methods?
We offer valuations to clients who are interested in learning about the fair market value of their business. While there are a number of methodologies and techniques used within the business valuations industry, they can typically be categorised into three core approaches: Asset based, Income based and Market Comparison based. When we conduct business valuations, a blended model is used based upon our appraiser's judgement, assets in questions, past and future cashflow capacities, as well as the depth and breadth of available financial data, operational and industry relevant data. Depending on your circumstances, our consultants may use all or a preferred method to value your business assets.
Asset based approaches
The asset, or cost approach considers the value of a business to be equivalent to the sum of its parts; or replacement costs for this business. This is an objective view of a business. It can be effective in quantifying the fair market value of an entity's tangible assets, as it adjusts for the replacement cost of existing, potentially deteriorating assets.
Income based approaches
The income approach identifies the fair market value of a business by measuring the current value of projected future cashflows generated by the business in question. It is derived by multiplying the cashflow of the company times an appropriate discount rate. In contract to asset based approaches, which are very objective, the income based approaches require the valuator to make subjective decisions about discount or capitalisation rates. Many considerations and variables are measured to account for specific contribution of primary value drivers in a business that result in influencing cashflow: revenue drivers, expense drivers capital investment etc. This method, which comes in several approaches, is useful as it identifies fundamental factors driving the value of a business. The investigation process, in this method also uncovers any factors that, if managed properly, has the potential market value of the business!
Market comparison based approaches
The market comparison approach to a business valuation is based upon current conditions amongst active business buyers, recent buy-sell transactions, and other fairly comparable business entities. Financial attributes of these comparable companies and the prices at which they have transferred can serve as a strong indicators of fair market value of the subject company.
What method do we use in valuation of businesses?
When a client engages our expertise to conduct a fair market valuation, we view that business through 9 or 10 approaches (all of which fall under the 3 primary methods discussed above) and then determine which of those are most applicable to that business and its types of operations, industry, history and future prospects.
When and how often should you consider valuing your business?
This is the question we are asked most often! Think of business valuation as a business owners performance appraisal!
Typically a business owner should consider valuing his/her business 2 years after start-up or continuous ownership to establish 1) base-line and 2) factors that drive values. Then repeat at least every 2 years and then finally 2 years before s/he intends exiting the business. Doing a final valuation 2 years before the intended exist gives the owner time and a plan to add maximum value to the business before exiting. Think of it as "house staging" for your business!
Understanding the factors that drive (or bleed) value keeps the business owner actively monitoring & managing those factors on a day to day basis ensuring long term growth in values! Whatever gets measured, gets done! As the business owner goes about his/ her day to day business s/he keeps an eye out for strategic steps that s/he can take to make pronounced leaps in value.
What happens to the value when a business goes through difficult time(s) & lost money last year?
Every business has some positive value providing it is expected to operate in the future. In fact our appraiser "normalises" the financial statements to reflect an average years' worth of financial statements to more accurately reflect the current value of the business.
Business Valuation is a specialist field. It's not always best to rely on business brokers or your in-house accountants to give you a feel for your business's value. Come see your advisor at Core Business Services to ensure that you've got time and a plan to maximise your business's value before it goes on the market!
The above publication discusses business issues generally and is not intended to be specific advice. Whilst every effort has been made to provide valuable, useful information, Core Business Services Ltd, any related suppliers, associated companies & practices accept no responsibility or any form of liability from reliance upon or the use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only. Please do consult with your advisor or call this firm for information / advise specific to your circumstances before finalising any particular course of action.