What is a Business Valuation?
A business valuation is a process that identifies the true value of your business, rather than its cost or current market value. For a business sale, a valuation is also used to analyse the future earning potential a business has.
For a business valuation to be of value, it needs to be accurate and transparent. However, the process of a business valuation, while a crucial exercise, is not always a simple one, and of determining a business’s true value can vary depending on the complexity and nature of a business.
Two key methods of determining your business’s value are through cash flow or earnings, and assets.
Cash Flow & Earnings
Cash flow and earnings for a business valuation are often determined by multiplying a business’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) or another key metric like revenues. For example, if a company’s EBITDA is $900,000 and it’s valued at four times that amount, it’s worth would be $3.6 million.
Assets
Asset-based valuation measure the value of any assets owned by the business, on the business premises, through your plant and equipment, stock, debtors, or intangible assets such as IP, and through any debts or liabilities the business may have.
As industries have evolved and new developments have emerged, particularly through technology based business, and technological advancement incorporated in a significant number of industries, businesses values are increasingly weighed and valued against intangible assets.
Intangible Assets
Intangible assets are those that do not appear on a balance sheet and include, for example, IP, customers, data, specialised and unique skillsets, processes, and the potential for future earnings.
Financial Statements & Normalisation
Financial statements are an integral part used for business valuation analysis, including financial comparison and ratios to analyse a business’s performance. When including financial statements and ratios, normalisation is key to reflect the true value.
Normalising financial statements includes adjusting the numbers to remove any out-of-the-ordinary or one-off revenues and expenses, to offer you a consistent and clear valuation of a business’s ongoing profitability.
Why is a Business Valuation Important?
When looking to sell your business, a business valuation offers you the chance to sell your business with confidence and allows you to sell your business from a position of strength and knowledgeability.
From a selling standpoint, a business valuation empowers you to price your business fairly, maximising the return on your investment and gives you negotiating power to leverage.
Fair Pricing
An accurate and transparent business valuation ensures you can price your business appropriately, allowing you to attract genuine buyers while maximising your return.
Negotiation Power
A valuation offers you the chance to understand and identify the value of every aspect of your business, strengthening your position during negotiations, providing a good foundation for justifying your asking price.
Understanding the importance of a business valuation and how this can empower you as you navigate the sale of your business, or plan ahead, can help you to ensure you maximise the value of your investment into your business. It offers you the tools to price your business appropriately, and to enter negotiations and conversations with genuine buyers from a position of knowledgeability and strength.
It is crucial to have an accurate and transparent business valuation, emphasising the importance of working with a business and brokerage with the integrity, knowledge and experience. Turn to LINK Business to for more information and assistance in valuing your business at linkbusiness.co.au/get-in-touch/