Do you know how much your business is worth? If not, preparing a business valuation is the best way to get this information. Through this process, you can get a better knowledge of your company assets, obtain your true company value, understand its resale value, attract more investors and resolve legal issues.
In this article, learn the definition of business valuation, its importance, how to value a business in Australia, and the different methods of valuation.
What is a business valuation and why is it important?
Business valuation is the process of working out the total economic worth of your company. There are several reasons why you must know the value of your business, including:
- To sell your business or buy another one at a fair price
- To attract investors
- To get a business loan
- To add shareholders
- To use for certain tax purposes
In short, when you know the value of a business, you can come to the table prepared whatever your goals are — be it to buy, sell or get capital. Additionally, it gives you the confidence that you’re not underestimating or overestimating business value.
How to value a business?
You can start with this three-step process to work out how much your business is worth:
1. Gather your business records
Prepare all relevant business documents to value your business thoroughly. Here’s a list of records you might need:
a. Information on finances and assets
✔ Financial statements (at least five years)
✔ Information on tangible assets (e.g., machinery, buildings, equipment, stock)
✔ Information on other intangible assets (e.g., intellectual property, goodwill, the future outlook of the industry)
b. Legal information
✔ Legal documents
✔ Registration papers (ABN, licenses, permits)
c. Business information
✔ Business history
✔ Sales information
✔ Business procedure documentation
✔ Business plan
✔ Market conditions
✔ Other relevant details about your business
d. Staff, supplier and customer information
✔ Employee details
✔ Supplier details
✔ Customer details
Read Next: Three Reasons Why Financial Reporting is Important
2. Consult with business valuation specialists
Rather than preparing a business valuation yourself, consider getting professional advice to obtain an independent, objective assessment of your company’s worth. These professionals can be either an accountant, business consultant, business broker or financial advisor.
During the process, these professionals can help you:
- Analyse your business finances
- Research trends in your industry
- Determine the goodwill value of your business
- Project your business’s potential profits
- Work out a fair value for your business
- Provide advice on how to value your business
- Determine the best business valuation method/s
- Speed up negotiations
3. Choose a valuation method
Figure out which valuation method (see the list below) is the most ideal based on the nature of your business, its years of operations, circumstances of the sale, market trends and other factors that might affect its total value.
You should also consider these key concepts:
- Fair salary for owner: Whether you choose to include or exclude information on the fair salary for the owner, will affect the net profit you expect to generate from the business.
- Fair return on investment (ROI): Fair ROI refers to the return you expect to receive from the business. If you’re a buyer or an investor, knowing this piece of information is crucial to determine if the business is worth investing in.
- Fair return on net tangible assets: It gives information on the return you can get from the net tangible assets of the business.
- Super profit: It refers to the amount left after taking out the fair salary for the owner and the fair return on net tangible assets. It’s calculated using this formula:
Super profit = Annual profit – (Fair return on net tangible assets + Fair salary for owner)
Business valuation methods
How to value a business? Check out these business valuation methods to determine which one works best for you:
- Comparable sales method: The comparable sales method gives you a realistic idea of how much your business is worth by comparing how much similar companies from your industry have sold for.
- Asset valuation method: It determines the business value by calculating your total net asset value minus the liabilities on your balance sheet.
- Capitalised future earnings method: This method considers the business’s future profitability based on its cash flow, annual ROI and expected value. It’s ideal for stable businesses that expect to receive consistent profits in the future.
- DCF Analysis: Contrary to the capitalised future earnings method, discounted cash flow (DCF) analysis is more ideal when your profits are not projected to be consistent in the future.
- ROI-based valuation method: As the term suggests, it evaluates value based on your company’s profit and the type of return on investment (ROI) it can give to potential investors.
- Earnings valuation method: This valuation method calculates the maximum worth of your business by assigning a multiplier to its current revenue.
As mentioned earlier, you can combine two or more valuation methods to work out the actual worth of your business. It’s still best to coordinate with a business valuation professional to value your business properly.
Business Valuation Service in Sydney
In need of professional business valuation advice? ABJ Solutions is here to assist you. Process your records and work out the real value of your business through the help of our experienced accountants.
Contact us today to know more about our services.
