Business owners often come to us and say things like: “I want to sell my business/I’m interested in taking on a new shareholder/I want to get some finance for my business … and I have been advised that my business is worth X.”
My common response is: “We’re happy to help, but on what basis is your business worth X?”
The answer is usually along the lines of: “Oh well, that’s what I was told by my business advisor/financial planner/tax advisor/etc.”
Matching skills to requirements
There are a range of professionals who position themselves around servicing small to mid-sized private businesses.
They offer different aspects of advice and many of their skills and capabilities are neatly matched to that advice.
However, when faced with the question from their client, ‘what’s my business worth?’, many have to step outside their core area of expertise and try to provide a perspective.
As an accredited business valuer with the Australian Property Institute, and particularly specialising in going concern business valuations, I get frustrated when other advisors give business value advice based on very limited experience, which is then invariably taken as gospel by their clients.
This can often lead business owners down a very dangerous route in terms of the perception of what value may or may not be in their business – just as an inexperienced advisor can over-value a business, so they can under-value it.
What to look for in a business valuer
Business owners who want a robust valuation on their business should seek out someone who:
- has valuation qualifications and is a member of a professional valuation body
- has regular experience in conducting business transactions in the market and in valuing similar businesses
- can show that they have valued a business similar to yours in the past 3–6 months
- displays an understanding of your industry, your sector and your type of business
- has detailed and regular experience in valuing going concern businesses, versus real property
- is familiar with different valuation methodologies and has an open mind about which one they will use in your case
- indicates they will assess both financial and non-financial business health factors in the valuation process
- is experienced in conducting valuations for different purposes and scopes e.g. sale, new shareholder, family dispute, business performance, restructuring and statutory requirements.
But isn’t business valuation just ‘hocus-pocus’ anyway?
People often criticise business valuation – and sometimes I’m one of them – because it’s a very theoretical process.
In fact, some cynically regard it as hocus-pocus: part science, part gut feel, coupled with a bit of rationale.
It’s true that business valuation is not an exact science, but good valuers base their valuations on empirical evidence and robust assessment, underpinned by regular engagement in the market.
They are able to demonstrate an understanding not just of the business, but also of the environment it operates in.
To this they add commercial judgement and knowledge of the trends, issues, transactions and dynamics of the market the business operates in.
Playing to your strengths
Often another advisor will give a value based on a valid methodology such as market multiples, business maintainable earnings, or discounted cash flow, but very rarely does that advisor operate in the market on a regular basis, seeing sales and purchases of like businesses.
Many advisors – financial planners, accountants etc – refer valuation assignments to us, just as we refer specialist work, such as capital gains tax assessments associated with sales and restructuring, to others. In that situation we are both playing to our core skills and capabilities.
How valuation ‘scope’ impacts result
Often a business valuation result comes down to the scope of the valuation.
In other words, is the scope of the valuation associated with:
- an indicative market appraisal of what the business might sell for in the market today
- a capital raising
- a marital dispute
- a restructure of entities and the subsequent tax and stamp duty implications
- a business improvement program?
The scope will impact the result because it frames the boundaries around the items, evidence and issues to be considered, as well as the methodology to be used.
Examples of ‘scope’
Some clients just want ‘the number’ i.e. “we want to sell the business, or we want to bring this new shareholder on, and we just need to know what the business is worth”.
Other clients are not actually looking to sell their business, but instead want to improve it (and its value) over time. They want to know what it’s valued at today but, more importantly, what it could be valued at in the future if certain aspects of the business change.
This type of valuation will give insights into:
- contributors to value
- detractors to value
- actions that might change – and, ideally, enhance – value.
In my experience, this is where business owners get real value from a business valuation process.
Lift your expectations
My advice to people seeking a business valuation is to lift your expectations of what you need from a business valuation.
Whether you are simply seeking ‘the number’, or a means of an enhancing business performance and long-term value, an experienced business valuer is your best bet to provide a robust, realistic and up-to-date assessment of your business’ value.
You can then use this assessment as a decision support tool to assist you in moving ahead.
The JPAbusiness team regularly conducts business valuations and market appraisals of small to mid-sized businesses. For more information contact the team on 02 6360 0360 for an obligation-free discussion.
James Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers. James is an Australian Property Institute Certified Practising Valuer (Business).