Business valuations can be very complex, but the concepts are easy enough to follow. To get a real valuation of a business you will need to take into account the following things:
- You need to consider what assets and liabilities are included and excluded from the sale. Business valuations commonly include an ‘ordinary amount’ of fixed assets, accounts receivable, inventory, work-in-progress, trade creditors and employee provisions. ‘Excessive’ amounts of these items are typically added to or subtracted from the business valuation amount. Will the business be sold with any other assets or liabilities? If so the valuation will need to be adjusted accordingly.
- Are you valuing the business or the whole entity that owns the business? If you are valuing the whole entity you need to take into account additional assets and liabilities like bank accounts, loans and tax liabilities etc.
- Are you valuing the whole business or a minority interest? Minority interests are commonly reduced considerably because they are worth less than their proportion of the business valuation because they have more ongoing risks because they don’t have any real control over the business.
- Do you need to take into account what a strategic buyer might pay for the business? Businesses that get acquired for strategic reasons often sell for much more than businesses that get acquired for financial or investment reasons.
- Is the business valuation being used for a divorce? If so the courts would typically use a different concept of valuation known as ‘value to the owner’. This value can be significantly different from the value to a potential buyer.
- Has the business developed any products or patents that will generate a substantial increase in profitability in the future? If so, these increased profits need to be estimated and factored into the business valuation.
As you can see there’s a lot to consider when working out the true value of a business. I offer a free phone or online consultation for up to 1 hour to confidentially discuss the specifics of your business.
I hope you take me up on this offer, I think you’ll be surprised how much I can help you in 1 hour. Send me an email or call me directly on 1300 585 299.