What goes into a business valuation?
Business valuation relies on accurate information. Much of the process is down to research and analysis of critical points concerning the company in question. Licensed business valuers in Canberra are trained to assist business owners and investors by reviewing operations, financial performance, future prospects and more.
To achieve this, the valuers in question need highly specialised knowledge, experience and qualifications. Companies across every industry depend on them to make informed decisions in the case of mergers and acquisitions, raising capital or selling the company.
It goes without saying then that business valuations are no small feat. They are incredibly complex matters reliant on rigorous methodologies and intimate knowledge of the economy.
The information required for valuation depends on an organisation’s:
- size
- industry
- structure.
Other crucial aspects include reviewing financial statements, revenue and profit margins, market trends, customer demographics, competition, industry regulations and legal concerns.
These investigations are compiled into legally certified reports that can have significant effects on the business, as well as the larger local economy. For this reason, investors and company leaders should seek out independent valuers who can guarantee accuracy, objectivity and transparency.
Read on for a detailed exploration of the valuation process and the information required to ensure accurate business valuations across companies of all kinds in Australia.
What information is most important to a business valuer?
The information required for your valuation may differ depending on the reason for the report. In general, there are several key pieces of information needed that will extend across every form of business valuation.
The first of these would be financial statements. Those include:
- balance sheets
- income statements
- cash flow statements.
This documentation provides vital insights into the financial health, liquidity and performance of an enterprise. By assessing these financial statements, trained and qualified valuers can establish the organisation’s potential for revenue growth and cash flow generation, as well as profitability.
Also essential is information about the market and industry an organisation operates within.
In order to determine the potential for future growth and overall sustainability, your valuer will review the company’s:
- tangible and intangible assets
- liabilities
- intellectual properties.
Tangible assets include the likes of inventory, equipment and property, whereas intangible assets and intellectual properties refer to any copyrights, patents or trademarks of value.
Naturally, a company’s staff play an important role in providing value as well. Namely, its management team and employees. Valuers will investigate the overall levels of experience, expertise and potential impact on future earnings they infer.
Finally, the company’s client base forms part of the investigation as well. In particular, the valuer looks at the relationship with key customers to review the strength of potential revenue streams.
What are the types of business valuation processes?
The accuracy of any business valuation is determined by the efficacy of the valuation methods applied throughout the process. The primary techniques used include:
- asset-based valuation
- market-based valuation
- income-based valuation
- discounted cash flow (DCF) valuation.
As the name implies, the asset-based approach revolves around analysing and establishing the value of an organisation’s assets. These could include buildings, machinery and inventory and are generally used when working with asset-intensive businesses.
The market-based approach involves comparing the subject company to similar businesses that were recently sold. It accounts for the law of supply and demand and is best suited for companies that have publicly traded shares.
Income-based valuation is aimed at the organisation’s financial performance. Specifically, the valuer reviews expected future earnings, cash flows and growth potential. This is the most commonly used method for business valuations across most industries.
The DCF approach to valuation is generally used for companies with a high level of uncertainty about their future cash flows. The valuer will project the subject’s future cash flows.
Each of these methods has its advantages and disadvantages. The most appropriate method is entirely dependent on the specific circumstances and attributes of the client. Professional valuers hold the training and expertise to select and tailor the most effective methods for the situation.
What other options do I have to a standard business valuation?
There are several options available beyond the aforementioned methods.
The first of these would be the industry-specific valuation method. This approach puts a focus on the unique characteristics of a particular industry or sector in which the client operates. The valuer assesses industry trends, growth potential and the overall competitive landscape.
The strategic valuation method analyses a company’s potential to achieve its objectives by exhaustively reviewing its greater strategic plan.
The market-based valuation approach collects and reviews data from recent mergers and acquisitions. It looks at the likes of the market's perception of the company.
Should the traditional methods not paint an entirely clear picture of a company’s value, your valuer has a number of additional options available to them. Just like the conventional methods, the valuer is trained to adjust these methods for the situation to guarantee accuracy and reliability.
Summary
Business valuation is a comprehensive and accurate way to determine an organisation’s market value. Qualified valuers will assess a business’s financial and operational performance, income, growth potential, strategic plans, management team and industry to fully understand the organisation’s position in the larger market.
Taken together, these methods work across every industry and with companies of every structure and size. They can assist with investment and future planning, mergers and acquisitions, sales and purchases and more.
These reports are legally certified and comply with all the relevant regulations and legal requirements. They produce results that are high quality and dependable.
For more information on the process, reach out to one of our qualified valuers today.