When it comes to doing a valuation on your business there are several frequently used Business Valuation methods that can be used. Not all of them are thorough and not all of them will give you the most accurate Business Valuation regardless of your reasons for valuing the business in the first place. With over 20 years of experience valuing businesses, the team at FINH are able to deliver the best outcomes for the business owner.
FINH is a Brisbane based full service accounting and finance firm. David Harland, FINH’s managing Director is the Chairman of CPA Australia’s National Forum “Valuation of Equity and Other Securities”. The forum’s regular webinars can be viewed here.
Why Does a Business Want to Understand It’s Value?
A Business Valuation fundamentally gives the business stakeholders the ability to analyse where the value in the business lies and what can be done to grow that value.
The object is to develop a strategy that will maximise the intrinsic value of the business and that value can then be realised in one of two ways.
- Through the sale of the business – either in the near term or the longer term. In that case the business value clearly needs to be transferable to a new owner. (However, keep in mind that realising the value in your business doesn’t necessarily require you to sell it)
2. Through the current cash flow that you, as the owner of the business, can draw from.
So regardless of whether you plan to sell your business sooner or later – or never – you still have a strong incentive to maximise its value and you must understand value in order to do this.
Some Commonly Used Business Valuation Methods
There are a number of commonly used business valuation methods.
The most commonly used business valuation method is a short hand multiple method. That method itself is one that has many different meanings- Is it a multiple of EBIT (Earnings before Interest and Tax) or EBITDA (Earnings before Interest and Tax, Depreciation and Amortization)? Here at FINH, we recently have completed a matter where it was a Multiple of Revenue or a Multiple of WIP (Work in Progress).
These business valuation methods are fine when considering a starting point or some sort of bench mark against other similar companies although they are very dangerous when trying to come up with an accurate business valuation. In fact, it is like the chicken or the egg and clearly a multiple or short hand method is no way to value a business. It is really a quick benchmark way to communicate a valuation that has either been achieved or has already been completed in the case when there hasn’t been an arms length market transaction.
More Accurate Business Valuation Methods ( And the way FINH choose)
At FINH we believe there is only way to value any asset and in particular private equity or any kind of equity. That is using a discounted cash flow. The discounted cash flow is fundamentally based on the present value equals the future cash flow, divided by the risk of achieving that cash flow, less the growth in the cash flow. Or as below.
Value = Future Cash Flow
Risk- Growth
Growth is the potential of the business to increase its revenue and profit stream. A potential buyer will be interested firstly in the short term growth potential – over the next five years – as this will determine the income they can expect to generate for themselves.
There are three ways in which we at FINH believe you can enhance or increase your business valuation–
- Increase the cash flow
- Reduce the risk OR
- Raise the growth potential.
To really measure the value of your business, you need to be able to produce evidence of your intangible and tangible assets by referring to non-financial measures. This means paying attention to the critical management disciplines of running a business through the leading indicators of Strategy, Financial Management & Human Capital Management.
These indicators are typically Non Financial
To achieve the best value for your business valuation you will firstly need a business plan that links the strategic merit of the organisation to the financial attractiveness PLUS internal procedures and financial systems that are well documented and provide timely information. Accounting records that you receive 6 months after the end of year events and up to 18 months after events that occurred at the beginning of the financial year will not give you and accurate business valuation.
At FINH, we complete business valuations for many purposes including the following:
- When a seller is considering a merger, sale or acquisition, or when a shareholder wishes to buy-out other shareholders
- Due diligence for any purpose
- Capital raising
- A Corporate re-structure
- Family law matters and litigation support
- Management buy-in purposes
- To facilitate family succession and generational transfer of business wealth
Who are FINH?
FINH is a Brisbane based full service accounting and finance firm.
We offer a breadth of services in the areas of Business Strategy, Accounting and Tax Planning, Wealth Management and Investment, Valuation and Succession, and Finance and Governance.
Our point of difference is the FULLY INTEGRATED FAMILY BUSINESS Services we offer to our clients. Through 20 years of industry experience FINH’s mission is to assist our clients in making this transition and enjoying the benefits that come from being a FULLY INTEGRATED FAMILY BUSINESS.