The role of market value in business valuations
The market value of any company is a vital detail in making major decisions. It’s important for future planning, mergers and acquisitions, tax planning, litigation and more. Qualified business valuers in Perth are trained to determine the fair market value of any kind of company. Their knowledge of the local market and industry trends can play an important role in the economy.
Valuers use a series of well-tested methodologies to establish fair market value.
They are:
- income-based approaches
- market-based approaches
- asset-based approaches.
A licensed valuer may tailor these methods depending on the size, structure and type of business being valued. Each method has its pros and cons and is more suitable than others in different situations. In general, they are all based on degrees of market and financial analysis.
Other parties also play a role in determining the fair market value of any asset. These include the likes of regulators, tax authorities and investors.
Understanding the components of market value is critical for business owners and management teams. Whether they are selling or buying assets or involved in disputes or legal proceedings. Working with a qualified independent valuer on your company’s valuation is an excellent tool for managing, maintaining and improving value, as well as planning for growth.
What is fair market value?
No matter your reason for seeking out a business valuation, the goal is always to calculate its fair market value (FMV). This refers to the estimated worth of any property, including businesses and real estate, in an open and competitive market.
In the context of both business and property valuation, FMV dictates the price that a company or property would buy or sell for. The primary idea behind these services then is to ensure equity.
This involves a thorough investigation of the company’s financial and operational performance. They also include a review of the greater market and industry the company falls under. By using FMV as the basis for key decision-making and transactions, business owners can ensure they make profitable, sustainable moves to ensure survivability and growth.
What is fair market value of a business based on?
Establishing the FMV of a business is done through the rigorous valuation process. This is a multistage process of analysis that looks at numerous attributes of a business.
Factors that business valuers consider include a company’s:
- financial and operational performance
- market position
- growth prospects
- risk profile.
This is a far-reaching list made up of many, many components. Studying them involves reviewing financial statements, performing industry research, and carrying out a thorough investigation of the company's operations and assets.
Other areas that can influence a company’s FMV include:
- interest rates
- economic environment
- competition
- availability of financing.
All calculations of fair market value are based on the full suite of information available, as well as assumptions about the future performance and prospects of the company. That means it's important to work with professional valuers whose knowledge and experience you can rely on.
Who investigates the market value of a business?
To ensure accuracy, objectivity and transparency, fair market value is determined by licensed, independent business valuers. They specialise in reviewing and calculating the market value of businesses, assets and intellectual property.
Companies, stakeholders and investors work with valuers for a range of legal, financial, strategic and operational purposes.
Tax authorities and regulators will influence the FMV determination as well.
They hold the power to institute regulations that can influence an organisation’s value. Those could be environmental regulations or restrictions on foreign ownership. It is also possible that tax authorities may impose new taxes on certain business structures or assets.
Investors can have a significant impact here as well. It is generally investors who fund companies and subsequently expect a return on their investment. Their expectations for a company to grow and generate a profit can affect the company’s valuation.
The following factors can also influence the valuation:
- market conditions
- economic factors
- industry trends.
The methods used to determine FMV include discounted cash flow analysis, comparable company analysis, asset-based valuation and others. The methods used will differ based on the type of asset or organisation being valued.
Summary
Fair market value is a key point in any significant business transaction. For this reason, independent valuers are an essential part of the business landscape. The critical insights and analysis they provide to company stakeholders can support the management, maintenance and growth of their assets.
Calculating FMV is a thorough process that requires precision and diverse expertise. That’s why this analysis needs to be done by qualified professionals.
Qualified business valuers are important partners for business owners, investors, buyers and sellers.
This is the best way to ensure equity, accuracy, transparency and objectivity. It’s done through the market, income and asset-based valuation approaches that qualified valuers employ.
Ultimately, the market itself is the primary factor behind determining FMV. This includes supply and demand dynamics, economic conditions and other external factors. Financial and operational performance are vital aspects as well. Tax authorities and regulators can have a dramatic effect on the valuation too.
Regular valuations can help an organisation better plan for the future, understand the state of its operations and improve its financial and market standing.
Our team of business valuers are dependable and compliant with all the requisite quality standards and regulations. Call Business Valuations Perth team and receive a free quote today.