In the corporate landscape, the significance of business valuations should never be underestimated. The insight offered in a valuation report is massively beneficial for anyone with a vested interest in a company.
Business valuations are reports prepared by certified valuers that essentially outline the existing market value of an organisation. The information included in the report covers the financial and operational efficiency of the company.
As reports are prepared by qualified experts, they are accepted as proof of value in the eyes of the law. As such, they can be used in a range of business and legal transactions or negotiation reports.
Why you need a business valuation before selling your business
Selling a company is a huge decision filled with corporate complexities. The last thing anyone wants to do is sell at the wrong time or under false pretences, hence the importance of reliable business valuation reports.
A business valuation gives owners and stakeholders the information they need to make an informed financial decision. With a clear and definitive outline of the company’s financial and operational efficiency, owners can get a sense of exactly how much the business is worth in today’s market.
As reports are seen as official proof of value, parties can use the report as a basis for sales negotiations. In general, business valuation reports lead to swifter and smoother sales processes, saving parties both time and money.
The value of investing in a business valuation service
The advantages of business valuation reports are plenty. In all sorts of circumstances, an independent valuation report can be incredibly helpful.
A few of the main advantages of business valuation reports are:
- Determining fair market value: A business valuation report helps conclude the fair market value of a corporate organisation. This is essential for precise financial reporting, smooth mergers and acquisitions, prospective shareholder transactions, calculated planning, and other relevant transactions. Reports offer an unbiased assessment of the worth of the organisation, guaranteeing fair dealings among the parties involved.
- Investment decisions: For corporate investors, a valuation report provides crucial information covering the financial stability, assets and liabilities, growth potential, and various risks related to the company. All in all, reports lead to informed investment decisions based on objective evidence.
- Strategic planning: An independent valuation report is an incredibly useful tool when it comes to effective strategic planning. The report provides a clear insight into the strengths, weaknesses, opportunities, and risks at play; allowing owners to maximise strengths and opportunities while minimising risks and weaknesses.
- Negotiating power: A valuation report generally allows owners and stakeholders to negotiate terms more effectively and confidently. Decisions and sales prices can be justified with a report offering clear and concise company information. Negotiations are often much quicker and less of a strain on your general well-being.
- Dispute resolution: Legal disputes such as shareholder disputes, divorce, or partnership dissolution often requires a complicated division of assets. A valuation report serves as an unbiased assessment of the organisation’s value. It provides an impartial foundation for deciding conflicts and can assist in the fair distribution of assets or defining potential buyout prices.
- Insurance coverage: Anyone who owns a company should understand the importance of having appropriate insurance coverage. Valuation reports provide owners with a definitive outline of exactly how much insurance is needed for protection in case of damage or loss. As such, stakeholders are protected from potentially catastrophic results.
The process of business valuation
The process behind valuations is generally in line with a standard framework consisting of the following steps:
Define the purpose of the report
Valuers first outline the purpose of the valuation, such as pre-sale or pre-purchase guidance, strategic planning, legal disputes, or any other related reason. The purpose of the report ultimately guides the valuer’s approach and method.
Gather data
Next, valuers collect important information regarding the business such as financial statements, tax returns, market trends, industry data, customer contracts, management structure, intellectual property, and any other significant documentation.
Choose a valuation method
The assigned valuer will then determine the appropriate method to assess a business. The most commonly applied business valuation methods are:
- The market approach: The business is compared to similar recently sold organisations. Market multiples such as price-to-earnings ratios or price-to-sales ratios are considered when determining the final market value.
- The income approach: The valuer focuses on the present value of future cash flows generated by the organisation. The approach is focused on forecasting the predicted cash flows and applying a discount rate (based on the time value of money and risk) to determine the existing market value of the company.
- The asset approach: This approach is mainly used in cases where a business is no longer generating profit. The valuer focuses on the net asset value of the business by reviewing the tangible and intangible assets as well as the existing liabilities.
Comprehensive financial analysis:
A business valuer carefully analyses the historical and projected financial performance of the company. This includes revenue, operational expenses, profits, growth rates, risk factors, weaknesses, and more. The valuer will apply the selected methodology to guarantee an accurate and fair report.
Make key adjustments
An important step. Valuers make adjustments to account for certain factors such as non-recurring expenses, market conditions, industry-specific risks or business-specific characteristics that stand out.
Prepare and review the report
The final step is for valuers to prepare the report based on their information and findings. The report is then thoroughly reviewed to ensure no missteps or mistakes have taken place. The final document will provide the definitive market value of the business in accordance with the objective evidence.
How long does a business valuation take?
The time it takes for a business valuation to be completed can vary depending on a range of relevant factors. Key factors affecting the duration of a valuation include:
- The complexity of the business
- The scope and purpose of the valuation
- The proficiency and experience of the valuer
- The availability of the information
- The location of the business
The timeframe it takes to complete the report can range from a few weeks to several months. A valuation for a straightforward business with readily available financial and operational data generally takes a few weeks to complete.
For larger and more complicated business types, the process may take a few months. Often, this is due to several business units and streams of revenue or complex financial arrangements and legal considerations.
What is included in a business valuation report?
The information covered by valuation reports will depend on its scope and purpose. In general, you can expect a business valuation report to cover:
- An executive summary: A concise overview of the valuation report with information on the purpose, key findings, and estimated value of the business.
- An introduction: A description of the background and context of the valuation such as the purpose, scope, date, valuer, and any professional qualifications.
- A business overview: A comprehensive review of the business including its history, nature of operations, products or services offered, unique characteristics, and the competitive landscape.
- A financial analysis: A detailed historical financial analysis of the business that outlines the revenue, expenses, profits, cash flow, and important financial ratios. Additional information such as industry benchmarks and comparisons are also included in the report.
- The chosen method: The selected valuation method is highlighted and explained to ensure clients understand the process. The formulas and calculations are explained in detail.
- Risk analysis: All related risks are reviewed and analysed to provide clients with a clear outline of the possible risks at play.
- Market analysis: The existing market conditions including market trends, growth prospects, competitive dynamics, market share, customer base, key competition, and any barriers or expansion.
- Future projections: Forecasts of the business’s future financial performance are included to provide owners with key insight into revenue growth, capital expenditure and a range of other relevant factors.
- Final value: Finally, the report provides a definitive market value to be assigned to the business based on the objectively available evidence.
Summary
In Brisbane, business valuations are an essential tool for anyone and everyone in the corporate landscape; especially for those trying to sell a business.
Valuation reports offer key insight into the market value of the business. The information included in reports covers a range of business-related considerations and allows owners and stakeholders to make informed decisions.
Reports can serve as a basis for sales negotiations. Owners and stakeholders can justify price points and use the report as a foundation to guide the process going forward. Stakeholders can also avoid making potentially regrettable decisions based on false pretences.
The valuation process involves a range of meticulous steps to guarantee a high standard of accuracy. Valuers apply a combination of reliable methods and consider several factors.
The advantages of valuations range from improved strategic planning to swifter sales negotiations. The information included provides insight into the operational and financial efficiency of the business.
For more information on business valuation services in Brisbane, give us a call today and speak to one of our qualified experts.