Reasons for Business Valuation
There are many reasons why business owner may need to know value of the business.
· Settling dispute between partners (Marriage & Business)
· Selling part of a business to a partner or other entity
· Preparing for business foreclosure
· Transferring ownership to another family member
· Evaluating possibility of selling the business
· Preparing business for getting financing
· Preparing to acquire another company
Types of Business Value
When referring to "business value", you have to be specific about type of value in question. Business has its "book value", "fair market value" and "liquidation value". Any accountant can easily calculate book and liquidation value. Fair market value of the company is much harder to calculate and can be accomplished only by an experienced professional, skilled in business valuation and knowing the current business market situation.
Components of Fair Market Value
The components to be considered for determining business value?
Financial - the last 3-5 years, Accountants Trading Statements, Income and Expenditure and Balance sheets are used. These indicate trends in revenue, profitability and can be compared with industry average indicators and are used to determine a weighted income average
Business systems and procedures – How the business operates, how it is run and managed. Management and staff positions, job descriptions, experience, staff turnover, stock control, advertising and marketing, length of operation, suitability of premises and location, ownership desirability, effects on the environment, volume of sales and support from the client base. All of this information gives a better idea of the risk value of the business.
Owner Management or Under Management - What would happen if current owner is no longer with the company? Would it slowly lose business, or continue running without major problems? How easy is it for the buyer to replace the owner? If it is Under management, will the management continue, what contract or work agreement is she/he on. These answers add to the risk assessment of the business.
Sourcing and customers. How diverse are supply and distribution networks? What happens if one of the major players leaves? Does company have a uniquely targeted distribution network, or hard to repeat distribution concept? Answers to all these questions significantly affect company's value. Few Suppliers and Few Customers adversely affect the value, whereas the reverse decreases the risk.
Valuations generally have to be backed up with evidence to support the assumptions, this process makes the Valuation a weighty document and takes time to address and evaluate all the information. Depending on the reason for the Valuation it may be required to be defendable in court, these valuations can take time to prepare and a reasonable sum may be required to have them prepared.
For a Business VALUATION call one of the AIBB Business Valuers members of Business Brokers Network Australia