A business valuation helps determine the economic value of a business. It is usually used for taxation purposes, to understand its sale value, establishing partner ownership, and divorce proceedings. If you are a company owner looking for a business valuation in Canberra, you can contact professional business evaluators to get an objective estimate of your company's value.
Why Is A Business Valuation Important?
Business valuations have many benefits. Given below are some of the advantages:
- It tells you if you are in the right business.
- It helps you determine whether you should buy or sell a business.
- It acts as a business performance scorecard and tells you how your business is doing.
- It helps you assess your future performance and plan well.
- It is required for tax planning.
Common Questions People Have About Business Valuations:
Here are a few common questions about business valuations that people may have:
What Challenges Will I Face When Getting My Business Valued?
While getting a business valuation is essential, it may not always be easy. Here are a few challenges you may face:
- Choosing the correct valuation method
- Determining whether cash flow and forecast earnings are realistic
- Getting accurate historical data about the business
- Doing the right research and getting accurate information on the industry and business model
- Providing convincing evidence to support the forecasts
What Are The Different Methods Used In A Business Valuation?
There are several ways for a company to be valued. The most common methods include:
Market Capitalization
This is the easiest valuation method. The company's value is calculated by multiplying the company's share price with the total number of shares outstanding.
Times Revenue Method:
This method applies a stream of revenues generated over time to a multiplier. The multiplier depends on the industry and the economic conditions at the valuation.
Earnings Multiplier
The earnings multiplier method is sometimes used to get an accurate understanding of the company's value. Any company's profits are more reliable than sales revenues. This method adjusts the company's future profits against cash flow invested at the current interest rate over the same period.
Discounted Cash Flow Method (DCF)
The DCF method is similar to the earnings multiplier. It is based on the projections of future cash flows. These projections are adjusted to derive the current market value of the company. The main difference between the DCF and the earnings multiplier method is that this method considers inflation while calculating the present value.
Book Value
This method refers to a shareholder's business equity value as shown on the balance sheet. It subtracts the company's total liabilities from its total assets.
Liquidation Value
This method considers the net cash that any business will get if its assets are liquidated and all liabilities paid off. It is commonly used for companies that are being assessed for bankruptcy. It calculates how much capital equity is present after paying off the debts. It is calculated by summing the total worth of the company's physical assets. It doesn't include any intangible assets.
What Are The Different Values Used In Business Valuations?
The type of values will depend on the purpose of the valuation. The common types include:
Fair Value This is a statutory standard. It is commonly used in court cases involving shareholder oppression, dissenting shareholders, divorce, and other litigation. The application of fair value varies on the case type and legal jurisdiction.
Fair Market Value This is the cost at which a willing buyer would buy the business from a willing seller. In Fair Market Value, the seller is under no compulsion to sell, and the buyer is under no compulsion to buy. Fair Market Value is used for estate and income tax purposes.
Investment Value This value is commonly used in acquisitions and mergers for a particular investor or buyer. It is based on their specific expectations and requirements.
How Different Is A Business Valuation From An Appraisal?
Business valuations and appraisals are the same. Valuation professionals use both these terms interchangeably. What experts call the entire process is not very important. You must understand the scope of the business analysis and the level of the report that is being proposed.
When Should My Business Be Appraised?
Whenever you have an essential decision about value, you should get your business appraised. An incorrect business value can lead to a failed sale, ESOP, buy-out, acquisition, tax filing, or dispute resolution.
How Different Are Enterprise Value And Equity Value?
Equity value, also known as market capitalization, refers to the market value of a shareholders' equity within a company. It is calculated by taking the enterprise value and deducting any net debt.
On the other hand, enterprise value refers to the total value of all the company assets. It is commonly used in company valuations because it considers factors that may not be included while calculating equity value
What Are The Common Multiples Used In Business Valuations?
Multiples are used for evaluating a company in the comparative analysis method or the multiples method. This method values similar companies using the same financial metrics. The most common metrics include:
- Price to Earnings (PE)
- Price/Earnings to Growth (PEG)
- Price/Cash Flow
- Price/Book Value
- Enterprise Value to Earnings Before Interest and Tax
- Enterprise Value to Earnings Before Interest, Tax, Depreciation, and Amortization
- Enterprise Value Generated by Sales
What Are The Factors To Consider When Choosing Comparable Companies?
There are three common factors that you may consider while choosing comparable companies:
Industry Classification Companies can be easily compared at a high level based on industry classification
Financial Criteria You can examine revenue, EBIT, EBITDA, and EBITDAR under these criteria
The third factor to consider would be the company's geography. https://www.businessvaluationcanberra.com.au/ offers professional and detailed business valuation reports for start-ups, large corporations, and SMEs. Our goal is to provide our clients clarity and assurance that they need for any decision related to their company's future.