How to Value a Business
Contrary to belief, a business’s value is built on a lot more than looking at the numbers. In fact, an experienced business valuer will take into account a business’s financial statements, wages and position/role ratios, while also considering industry and ATO benchmarks and the larger economic market.
When valuing a business, there are three main alternative methodologies that our business valuers will use. These methodologies are considered a standard practice when valuing a business, each designed to suit specific business types. These include:
Capitalisation of Future Maintainable Earnings:
This approach is the most common methodology that our business valuers utilise to calculate a business’s value. The process is relatively simple: our team will take a look at your business’s historical financial statements and use a formula to determine its anticipated future earnings. This is accomplished by utilising industry-based multiples and ATO key benchmarks to weigh against the business’s earnings. From here, our business valuers will normalise the business’s earnings and eliminate any one-off expenses and inconsistent variables to account for any undue influence.
Taking into account industry standards and overall economic stability, our business valuers will apply a weighting method on the business’s overall earnings after normalising the figures. This will be used to determine its anticipated future earnings, and in turn, calculate the business’s fair market value.
This methodology is commonly used for a variety of business types including start-up companies and small to medium sized enterprises.
Net Based Assets Approach:
This methodology will only focus on the value of the business in terms of its assets. As such, our business valuers will take a look at the business’s list of all tangible and intangible assets and value them against any financial obligations. In most cases, this methodology is reserved for business’s who are considering closing down or if the business is unlikely to create any future revenue. As it only focusses on the assets of the business, it is usually assumed that there is nothing left of value for the business to continue on and tends to have little to no goodwill left.
The Discounted Cash Flow Methodology:
As its name entails, this methodology uses the business’s forecasted cash flow statements to determine its current value. As such, because a majority of companies do not have the capacity to calculate such forecasts, this approach is usually saved for larger entities. Larger corporations generally utilise cash flow forecasts to track investment opportunities and weigh these against potential economic risks.
As a result, our team of business valuers will utilise these forecasts and apply industry-based formulas to weigh these forecasted earnings to calculate it back to the fair market value. In doing so, it will also take into account any associated risks in relation to these forecasts and apply them to the business’s overall value.
While this methodology is relatively exclusive, our team of business valuers have utilised this approach for a number of larger entities for a range of purposes.
Our team have the experience and understanding to help our clients with their next business-related decision with a quality business valuation. For more information on how we can help you, contact our expert team on (08) 7081 2088 or complete one of our online enquiry forms.