Advivo’s Managing Partner, Leon Stephan, discusses when you should consider getting a valuation for your business.
Business valuations are one of our most frequently requested corporate advisory services at Advivo, and rightly so. They provide business owners with a deeper insight into the figures behind their business, including its worth or value in terms of market competition, asset values, and income values. These insights are vitally important and should be something that all business owners have available.
The valuation process
It’s important to understand that not all valuations are the same; there is a significant degree of complexity and cost depending on its purpose and intended audience. These factors will also often specify the degree of detail needed in the valuation, such as whether independent market research or a detailed competitor analysis is needed.
A business that has been trading for many years and has a long-term consistent trading history is much easier to value. This is because historical trading results generally provide a guide to what future cash flows and profitability might be, which therefore makes it easier to prepare the financial forecasts needed.
Valuations for a new start-up, a rapidly growing or declining business, a highly seasonal business, or a distinct intellectual property will be more complex. These require greater research into the figures and assumptions that support the financial forecasts.
A valuation report consists of three parts:
- The report details the business history, the market, the risks, the objectives, the people, etc.
- The financial forecasts include detailed notes and assumptions supporting the financial modelling.
- The valuation assessment.
The financial forecast helps analyse an appropriate risk rating for the business and, using the discounted cash flow methodology, translates the financial forecast numbers into a present-day valuation estimate.
When you should value your business
Valuations are usually required for a specific purpose, not when you just want to know what your business or intellectual property is worth. Below are some common reasons why a valuation would be needed and who they might be for:
Merger or acquisition
If you are planning to merge with or acquire a business, a report is prepared to help you identify how much to pay and assist with negotiations. For mergers and acquisitions, a valuation also forms part of the due diligence process and generally uncovers a lot of essential information such as risks and issues.
Business sale
The reverse of above is also true. If you want to sell your business (or part of your business), an independent assessment is essential to know how much to list it for and to assist with negotiations. We also recommend preparing your own due diligence information material, in which a valuation would be a key part.
Estate planning and estate finalisation
To understand the value of an estate and assist with asset allocations to beneficiaries, it is essential to know the value of any asset.
Succession planning
A business valuation is often part of a larger process of passing your business onto the next generation. To make sure all family members are happy, you need to know the business value. The stamp duties office will also need it for transfer documentation.
Restructuring
Business restructure often requires stamp duty calculations which require a valuation. Additionally, in some cases, you need to be below a certain value to access some concessions.
Raising capital
If you propose to raise equity to finance your business, you need to be able to produce a capital raising document and price the value of individual shares. The business, therefore, needs to be valued to allow those calculations to be made on an as-is- and post-capital raising basis.
Obtaining finance from banks and lenders
Depending on the complexity and amount of capital being sought, lenders will sometimes ask for a business valuation to understand the level of risk exposure their debt carries compared to the overall value if something goes wrong.
Existing investors
Existing investors in businesses will often want updated valuations if their investment is mainly capital growth as opposed to dividend producing.
As you can see, there are many reasons for needing a business valuation, however, the users can generally be broken down into 3 categories:
- Internal (business owners and family members) for information and planning purposes
- External as the basis for an investment decision to invest in or to acquire the business or part thereof
- Statutory bodies such as the ATO or Office of Stamp Duties.
No matter your reason for getting a valuation, Advivo’s specialist corporate advisory division is here to help. If you would like to obtain a quote or order your valuation, please download and complete this Valuation Order Form and get in touch today so we can help get you sorted.
