Get the knowledge you need to make well-informed financial decisions at our upcoming events. Register now.

Loading...

What is the Best Business Valuation Method?

2019-03-15T23:12:27+10:00

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?

Business Valuation

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
  • Cashflow
  • Profitability
  • 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.

IMPORTANT INFORMATION: This blog has been prepared by Modoras Accounting (QLD) Pty. Ltd. ABN 81 601 145 215. The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individual's personal circumstances have been taken into consideration for the preparation of this material. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Accounting (QLD) Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Accounting (QLD) Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Accounting (QLD) Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Accounting (QLD) Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication. Liability limited by a scheme approved under Professional Standards Legislation.

Testimonials

“There are things I must do in the next five years to make that happen, but I know what they are and am working towards them. This is a much happier prospect than what I believed would be my lot when I reached retirement age.”

Scharlaine

“I will remain with them as they have been great to me for many many years.”

Sharn

“I’ve been a customer for several decades(scary how time flies). The service has always been impeccable, consistent, friendly.”

Colleen

“Very happy with the ease of experience. And extremely happy with my return…much more than I anticipated.”

Angela

“The process suits me perfectly, the details and everything you need from me is provided. You then review and I come in to sign where appropriate. In a busy schedule, it suits me perfectly.”

Richard

“Our business with Modoras is always very professional and friendly making it a pleasure to attend.”

Peter & Merle

“I have recommended Modoras to friends and family. My sister in law is now a client.”

Glenn

“Professional service with the personal care factor.”

Kathy

“We are very happy with the service that Modoras have provided and find all staff very friendly and helpful.”

Tom

“Super friendly staff . Would recommend and have recommended.”

Danielle

“We really enjoy the hospitality every time we visit the office, to meet and talk directly with the ‘Modoras family’ has a huge impact in entrusting our financial future.”

Robert

“We have built an excellent business rapport with our Accountant over many, many years. He has managed both personal and business tax and accounting matters for us. It is a pleasure to attend the lovely office in Mt Gravatt. The Reception staff are friendly and efficient. AND they make a great coffee!”

Rosemary

Financial Planning and Credit services are offered through Modoras Pty Ltd ABN 86 068 034 908. Australian Financial Services and Credit Licence No. 233209.
Accounting services are offered through Modoras Accounting (QLD) Pty Ltd ABN 81 601 145 215, Modoras Accounting (VIC) Pty Ltd ACN 145 368 850 and Modoras Accounting (SYD) Pty Ltd ABN 18 622 475 521

Copyright Modoras 2018. All Rights Reserved.