A crucial part of owning or running a business is knowing its true market value. Getting an accurate analysis, however, can be a bit complex and the opinion of an expert is needed. This is where business valuations come in handy.
An independent business valuation is an assessment of a company’s worth based on objective financial and operational data. There is no outside influence or internal bias that plays a role in the creation of the report. A certified valuation, therefore, serves as your best bet to find the worth of your company.
Business valuations in Perth come in many forms and with plenty of benefits. It doesn’t necessarily matter what type of company you’re running, a valuation is an inevitable necessity.
The reports are prepared by qualified professionals with experience in commercial and financial accounting. Valuers have undergone extensive training and have all the necessary tools for accurate assessments.
You’ll want to make sure your valuer has all the needed information to guarantee a precise and comprehensive valuation report.
What information do valuers need?
For the best results, owners and investors should make sure they’re prepared for a valuation. A business valuer will need several different pieces of information in order to guarantee a comprehensive and quality report.
If you’re asking yourself “what is the most important part of a business valuation?”, the answer lies in the documents given to the valuer.
A few of the most important documents you’ll need to provide your valuer with include:
- Profit and loss statements
- Balance sheets
- Taxation statements
- Cash flow forecasts and projections
- General information describing products and services
- A list of important assets and inventory
- Details of liabilities
- Any reports regarding the business by other professionals or consultants
- Any other information you feel may be important.
The purpose of the business valuation will guide the valuer on what information is needed for the client-specific report.
What types of business valuation processes exist?
Professionals overseeing valuations apply trusted methodologies when preparing reports. They are careful to meet all the regulatory and legislative requirements and operate under fundamental principles of honesty and transparency.
The three most commonly applied calculation methods are:
The capitalisation of future maintainable earnings
Valuers are focused on the company’s historical financial statements and apply a formula to determine future earnings. The organisation’s performance is closely analysed within the existing economic market via the use of industry multiples and ATO benchmarks.
A normalisation formula is then applied to eliminate any once-off expenses or inconsistent variables. By using the existing financial statements to interpret future revenue, the fair market value of the business can be determined. The approach is the most popular method of calculating an organisation’s value and is used mostly for small to medium-sized businesses.
The net assets approach
As you may be able to tell from the name, this approach focuses solely on the tangible and intangible assets of the business. The assets are weighed against financial obligations and liabilities.
This method is mostly used in cases where a business is closing down or is unlikely to make any future income. As such, the value of the business is determined by reviewing the assets and liabilities.
The discounted cash flow approach
Valuers following this approach focus on forecasted cash flow statements to determine the existing market value. Not all businesses have the capacity to prepare such statements, and this method is mostly used for larger organisations with the ability to predict cash flow as a method of tracking investment opportunities.
ATO standards and industry benchmarks are considered as well as any significant risks associated with the cash flow forecasts. With that, valuers can calculate the overall company value in accordance with the current market conditions.
Why are business valuations needed?
When it comes to the purposes of business valuations, there are several. Owners and investors will find a wide variety of benefits to knowing the true value of the organisation.
Some of the main reasons to get a business valuation include:
Strategic planning
A valuation provides owners with details on the operational and financial stability of the business. With this insight, organisations can oversee effective strategic planning that minimises risks and maximises strengths.
Tax planning
Nobody wants to find themselves in the midst of an issue with the Australian Taxation Office. A valuation for taxation purposes will outline all the necessary tax payments that need to be taken care of.
Legal disputes
In cases where the value of a business forms a significant part of a legal dispute or negotiation, a valuation can prove hugely beneficial. An independent valuation from a qualified expert removes the need for debate regarding the organisation’s value and parties can focus on the surrounding details of the case.
Pre-sale advice
Selling a business is a huge decision and should never be rushed. Getting a business valuation will give you a good idea of how much you’re likely to earn with the sale and you can therefore make an informed decision about whether it makes sense to sell.
Mergers or acquisitions
Valuations form an important part of mergers and acquisitions. Owners will want a clear outline of the financial and operational efficiency of a business prior to overseeing a merger or acquisition. A valuation ensures that owners have all the necessary details to make informed decisions.
Final word
A business valuation is a key service for owners and investors who are looking to get definitive proof of a company’s value. The independent service is taken on by qualified professionals with a unique insight into finances and business operations.
Anyone getting a valuation will want to make sure that valuers have all the needed information to prepare accurate reports. Financial statements, cash flow forecasts, balance sheets, transaction records, and more will assist professionals during the assessment.
Valuers apply trusted and tested methods when performing their calculations. The three most popular methods are the capitalisation of future maintainable earnings approach, the net assets approach, and the discount cash flow approach.
The reasons to get a valuation range from assisting with strategic planning to serving as proof of value in legal disputes. No matter the business type, a valuation can be hugely beneficial.
If you’d like to know more about what information is needed for business valuations, feel free to give us a call today. Our experts are happy to assist.