Valuing a business.
Here are a variety of reasons to determine the value of a business. Knowing what a business is worth is necessary when you are:
- buying a business
- selling a business
- getting a business loan
- attracting investors
- valuing your own net worth
- In a Shareholder and Partnership Buyout or Dispute
- Part of a Marital Dissolution
Valuing a business can be done in different ways – some more complex than others – and each method has its advantages and disadvantages. In most cases, valuations are based on a combination of methods.
Below is an overview of business valuation, including the information you need to gather and the most common methods of valuation.
In order to value a business, your financial adviser or valuer will need to see three or five years (if possible) of financial statements. They may also need to visit the premises to check operations and the company’s assets. They should also consider intangible assets, such as intellectual property, goodwill and the future outlook of the industry, and compare the business to similar competitors on the market.
The business valuer will need to consider which method of valuing a particular business is the most appropriate. Not all methodologies are suitable to every type of business. The most commonly used methodologies are:
- Net Present Value (NPV) of future cash flows or Discounted Cash Flow method (DCF).
- Capitalisation E.B.I.T. Based on estimated Future Maintainable Net profits / Expected future profits principle.
- Multiple of P.E.B.I.T. Based on the purchase of past profits – Future Probability principle.
- Capitalisation of estimated maintainable Super Profits – Excess earnings.
- Market based methodology (sales of comparable competitor businesses).
- Internal Rate of Return.
- Rule of Thumb – Industry method.
Buyers and sellers often have different ideas about what a business is worth. For this reason, it is a good idea to contact a business broker or professional valuer to provide a balanced and independent valuation. The ABBA Group offers valuation services that provide a more complete picture of a business’s value – information that will be indispensable during negotiations to purchase a business.