If you’re a potential purchaser, proactive vendor, or hopeful borrower, you might be wanting to know which business valuation method is best. We tell you here.
This article is published by Modoras Accounting (QLD) Pty Ltd V11022019
Which valuation method is right for your business?
If you’ve been doing your research about getting a business valuation, you probably know there’s several ways to arrive at the magic number that sums up what a business is worth.
But, valuing a business can be tricky because it’s not always a simple calculation of financial data. Some valuation methods rely on subjective or qualitative data as well.
So, how do you work out which business valuation method is best for your situation?
It helps to start with the building blocks of valuations first.
Why do you need a business valuation?
Business valuations are conducted for many reasons. Potential purchasers, proactive vendors, and hopeful borrowers are all types of people who are interested in a valuation to know the true value of a business.
There are a wide range of reasons why you might need a business valuation.
- Buying a business
- Selling a business
- Determining your net worth
- Seeking finance or investors
The type of business and the reason it’s being valued are both considerations in determining which business valuation method to use. We go into more detail about the reasons for business valuations here.
What information is needed for the valuation?
Although there are different valuation methods available, a valuer will still need to gather information to get a complete picture of your business to conduct the valuation.
According to The Chamber of Commerce & Industry Queensland (CCIQ), a valuer will consider most of these factors in their research:
- Size of your business
- Risk Profile
- Industry Outlook
CCIQ also provides some helpful insight into the mechanics behind valuations here.
You need to know what’s included
A business valuation is made up of both hard data and subjective data. The numbers are straight-forward, but it’s important that the subjective data is also underpinned by realistic assumptions.
A valuer or business advisor uses a set methodology plus a combination of experience and industry knowledge to ensure the final valuation amount is fully supported by facts.
Communication is key to understand the basis for the estimate. Your valuer or advisor should be more than willing to discuss this with you.
If you’re keen to understand more about what may be influencing your valuation, check out Dun and Bradstreet for business information reporting or the Australian Bureau of Statistics to get an idea of the current economic climate and industry trends.
Types of business valuations
We know you’ve probably googled business valuations and might be confused with the different types available. Here are the most common ones.
Earnings multiple method
This is a common valuation method and often used when valuing small businesses.
The adjusted profit of your business (usually EBIT or EBITDA) is multiplied by a specific number (multiplier) to determine the valuation amount. The multiplier is usually one that’s been accepted for your particular industry and will have been determined over time by sale prices for similar types of businesses. It’s important to note that the multiplier may vary depending on the strength of your business.
Remember to confirm the profit figure used by your valuer to ensure you’re both on the same page. It will have a significant impact on the final number.
Asset valuation method
This valuation method is simply a process of determining the net worth of a business from its assets and liabilities.
Assets – liabilities = net worth
This calculation includes the intangible assets of a business such as goodwill which can be difficult to determine without professional assistance.
Comparable sales method
By looking at sale prices for comparable businesses in the same area and industry, you can get an idea of the value of your business or the one you’re looking to buy.
A downfall with this valuation method is the difficulty in finding out the parameters that were being used in determining the final sale price. This information isn’t likely to be publicly available so it’s difficult to compare apples with apples.
How can I improve my business valuation?
Some components of valuations are calculated based on subjective information. And this is where unique strengths in your business can shine through.
Robust business processes, stable forward contracts, and upward trending movements in your business can all have a positive impact on a valuation.
A business valuation obtained in an advance of selling your business can help you identify key areas to improve before the putting the business on the market.
So, tell us. Which valuation method is best?
You may be surprised to hear that there not one method is more valid than another.
The valuation method can be dependent on your industry or your reason for valuing. And you may require a combination of these methods to come up with an estimate that is reasonable and makes sense for the type of business you’re running or considering.
No matter what type of valuation is best for your business, it’s always recommended to engage an experienced business valuer or advisor. With access to industry reports, technical knowledge and benchmarking, a professional will give you the most accurate estimate for your business.
Don’t worry about which business valuation method is best. We use the right methodology for your circumstances to give you a realistic estimate. Talk to our business advisors today on 1300 888 803.
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