Case Studies
Equity v. Enterprise Valuations
To start a business valuation in Canberra, it is important to first establish what exactly is being valued. It could be a single business, a company that holds interest in many businesses or several other formulations. Once we know what is being valued, we can then know if we are calculating the Equity Value or Enterprise Value.
Simply put an Enterprise Value is the value of a single business including all relevant parts of that business like Intellectual Property, Goodwill and all Plant and Machinery.
Equity Value on the other hand can be defined as the value of the company the business is operating through. This is calculated as the Enterprise Value plus any surplus plus asset after all liabilities have been deducted.
An illustrative example should help to further explain.
Hector owns and operates ‘Little Sheep in the Big City’ a business selling artisanal wool thread. He owns this business through a private company 'Hector’s Hectares and sheep Pty Ltd’ that also owns a sheep farm out of the city.
Hector wishes to focus on his farm as it now supplies several businesses like his. He decides that it is now time to sell ‘Little Sheep in the Big City’.
In an example such as this one we would want to determine the value of the business alone. This would be its Enterprise Value as it is only the business that is being sold and not the company that currently holds it.
On the other hand, if Hector wished to sell not only his wool thread company but the larger company as well we would need to calculate the Equity Value as well.
Business Valuations for Share Buy Backs.
Many businesses include a strategy of rewarding employees with shares of the company. In many cases this strategy can help give the employees a direct stake in the company and motivate them to achieve higher levels of productivity. However, there are times when this policy no longer works for both the employer and the employee.
This scenario should help to explain more.
‘Steel and Concrete’ are providers of building materials to many local and international clients. The original founders of the company started the business with a policy allowing employees to receive bonuses, either whole or part, as shares of the company.
This originally helped ‘Steel and Concrete’ retain an employee base that was both highly skilled and experienced as they felt more a part of the business they worked for.
A recent downturn in building in certain quotes matched with increased international competition had started to hit the company hard. The directors could see that they were in for a few years of less revenue but also felt confident that if they acted in a proper manner, they could weather the storm.
On the other hand, many employees were worried about the future worth of their shares in the company. On top of this the unit trust that administered the employees shares and paid out their dividends would no longer be self-supporting and require employees to pay in to.
It was now in the interest for both directors and employees to initiate a buy-back scheme of shares. This would afford the directors more direct control of the business and put many employees' minds at ease.
Before a price could be put on each share a value had to be calculated for the business. To avoid any potential disagreement between the directors and employees both groups agreed that an independent business valuation was in everyone's best interest.
Here we would perform a thorough valuation of the business taking into consideration both the previous years of growth and the forecasted downturn. To ensure that no bad blood existed between the employees and directors we can value each share without taking minority discount into consideration, increasing the value of each employee's share.
In examples like this one we provide an independent valuation that each side can then use to reach an agreement that works for everyone.
Employee Takeovers and Business valuations
We have seen many examples of former employees taking over a business as the original owner’s transition into retirement. Obviously, the current owners want to sell for the best price possible and the potential buyer is looking for a more reasonable price. But unlike negotiations between two unaffiliated parties in these cases both the buyer and seller have a pre-existing and oftentimes close relationships.
The following example scenario will show how this situation can unfold.
Samantha owned a sports equipment store. She makes a comfortable living from the business and has worked hard to make it a trusted part of her local community. As she moves towards retirement, she now only works three days a week and has been giving more responsibilities to her manager Danelle.
The two have had unstructured conversations about Danelle buying the business from Samantha when she decides to retire. This plan works for both women. It will give Samantha peace of mind that the business she created will be continued by someone as passionate about the work. For Danelle it will give her the ability to put some of her new ideas into practice and continue her work in the community she has grown so close to.
The only issue is the price. Samantha has had her accountant go over her business and calculate a price that works for her. Danelle and her accountant on the other hand have arrived at a very different number.
Neither woman want to lose their long friendship, but they also don't want to be taken advantage of. What they need is a value calculated by an independent valuer that both can agree on and understand.
Unlike the women's two accountants we are unbiased and independent of Samantha and Danelle. The detailed business valuation report we produce can be relied on to not only show an accurate value but also explain how the business is valued.
The number we arrived at was lower than Samantha’s. Her accountant was not as experienced as our valuers and had overlooked a few key pieces of information. Our valuation allowed the two to agree on a number based on an impartial value and facilitate a smooth transition of ownership.
When a Business is Involved in a Divorce.
Divorces are difficult. They involve complex legal processes mixed with an obviously emotionally volatile undertaking.
This process can be made even more difficult when a business is involved. During most divorce proceedings, whether inside a court or out of one, requires a detailed report on the finances of both parties. Many times, these finances will include a business owned by one or both.
Our team knows that divorces can be drawn out with disagreements over the value of assets that are to be split between the two. Accountants working directly for one of the parties involved might be accused of taking a biased stance with their valuation.
Circumstances like this one require an outside view. Our valuers are only motivated in providing a valuation that accurately shows the value of your business. Each member of our valuation team has over 20 years of experience and in that time have shown that they can be trusted to produce a truly independent report.
The certified reports that our valuers create detail not only the specific value of your business but also go to great lengths to show how they reached that value. With this level of information both parties will be able to agree on the value we calculate.
Business Valuations and Employee Shares
Many businesses find it worthwhile to involve their employees further in their company through an employee share scheme. Whether it is to incentives, job retentions or make employees feel further invested in the work they do, the instruction of these schemes call for a business valuation.
This example will further explain this process.
Purple Thoughts are in the business of creating IT solutions for accountants. The business has gone from strength to strength and is steadily growing. The only issue is in retention of staff.
The field of work that Purple Thoughts operates in is a highly competitive one filled with established businesses and new start-ups. This has led to a high number of staff members moving on to other businesses or starting their own.
The directors have decided that the solution to their issue is to encourage their staff members to remain at Purple Thoughts through an employee share scheme. This will give the employees a direct stake in the business, making them benefit from the growth of the business.
Before this could be done the business needed to be valued in a way that would satisfy the directors and the employees while taking the complicated nature of their work into consideration.
Our experienced valuers are able to produce a certified valuation report that is not only accurate but also highly detailed. Our valuers look at all the pertinent information to ensure that their valuation is calculated properly.
In occasions like this one we can produce a report that will satisfy both interested groups. This means that all further negotiations on an employee share scheme can progress from a shared position.
Our clients choose us at Canberra business Valuations for our high-quality professional team of experts. Contact us today to see how we can help you with next business-related valuation.