Understanding a business’ value is integral for management and planning for growth. The market value of an enterprise is determined through independent business valuation services. Business valuers in Canberra can provide reporting critical to entrepreneurs, investors and key stakeholders alike.
Valuations provide important insights into a company’s:
- financial health
- market competitiveness
- growth potential.
To draw conclusions on these multifaceted aspects of a business is complex. It requires the use of proven business valuation methodologies that combine market and financial analysis with broad expertise across numerous diverse industries. Each of these methods has its benefits and limitations. As a result, each valuation must be fully tailored to the client company.
The primary methods behind business valuation, which we will explore in more detail, are the income, market and asset-based methods.
To ensure accuracy and general reliability, valuers must consider industry-specific factors, economic conditions, regulatory requirements and market trends.
This process has a vital role to play in the Australian business landscape. Valuation reports are used to inform the processes of buying and selling companies, mergers and acquisitions, legal disputes, succession and exit planning, initial public offerings (IPOs) and more.
For these reasons, valuation reports need to be legally certified and developed by a licensed valuer with the appropriate qualifications, experience and market expertise.
The income method of valuation
The income method is one of the most important steps in the business valuation process. It is also one of the most commonly used and applies across practically every kind of company.
In short, the income method determines the value of a business based on its ability to generate future income and cash flows. For this reason, it is generally used to value organisations that are expected to reliably generate consistent and predictable earnings over time.
Qualified valuers employ deep analysis and accounting knowledge to estimate the current value of those potential future cash flows. They apply appropriate discount rates in order to project the expected cash flows over a specific period and discount them back to their present value.
This process factors in any risk associated with the business and must accurately reflect the required rate of return expected by investors.
Of course, the client business will need to hand over its financial data for this to take place.
Valuers look at:
- financial statements
- projected future cash flows
- growth rates and more.
Weighing these factors against one another calls on exhaustive industry analysis, reviewing market trends and considering the specific circumstances of the organisation being valued.
By considering future cash flows, and avoiding reliance on historical data or asset values, the income method provides a comprehensive and forward-looking assessment of a business's value.
The market-based method of valuation
Another frequently employed method of valuation is the market-based method. This approach relies on analysing the prices of similar businesses that have recently been sold in the market. Valuers will need to compile and compare the financial data and characteristics of these organisations.
This approach may not provide a suitably comprehensive statement of market value alone but is generally considered a supplementary part of the process that assists in ensuring accuracy.
It is considered a valuable approach due to its practicality and reliance on real-world transactions.
When making comparisons, valuers must account for the likes of:
- industry trends
- buyer demand
- economic conditions.
This way valuers can provide a realistic and market-driven assessment of a business's value. Note this approach is usually favoured when valuing small and medium-sized enterprises (SMEs) where the availability of financial data may be limited.
The method calls on the use of industry-specific databases, market research reports and professional expertise. This is essential when reviewing factors like revenue, profitability, customer base, intellectual property and growth potential.
The asset-based method of valuation
Finally, the asset-based method focuses on determining the value of a company by assessing its tangible and intangible assets. This is most useful when valuing companies with significant tangible assets such as property, inventory, equipment or patents.
The core of this method is subtracting a business’ liabilities from the fair market value of its assets.
This is why the asset-based method is often used for companies that are not generating consistent profits or are in a declining industry. It assumes that the value of a business lies primarily in its assets, rather than its future earning potential or market position.
Valuers account for any liabilities, including debts and obligations, to arrive at a net asset value.
However, this component of the approach may not fully capture the value of intangible assets.
These include:
- intellectual property
- brand reputation
- customer relationship.
Nonetheless, the asset-based method is widely used for business valuations in Canberra. It is tailored towards the size and type of business, as well as the purpose of the valuation.
When should companies get a valuation?
There are several key scenarios where business owners may want to consider a valuation.
One of the most common causes is a merger or acquisition. An accurate calculation of an organisation's market value serves as crucial support in negotiating a fair deal.
Another valuable situation is when planning for an initial public offering (IPO). This helps to determine an appropriate share price, attract investors and secure a successful listing.
During estate planning or succession planning, a valuation provides clarity on the business's worth for inheritance or transfer purposes. They are also useful when seeking external financing or partnerships as they provide a realistic picture of their value proposition.
They enhance a company’s chances of securing capital or attracting strategic alliances.
If you have questions on the business valuation process, be sure to contact one of our licensed valuers today.