While there are plenty of reasons to seek out a business valuation, it’s hard to know where to start. No matter what your reason is for requiring a business valuation, here’s a breakdown of what you’ll need, what to consider and why you should need one:
A business valuation is a report completed by a financial or valuation professional that provides a breakdown of the economic and monetary value of a business as a whole. With well over 2 million registered businesses operating in Australia, a business valuation is a valuable and worthwhile investment to obtain. As a small business owner, understanding the value of your business will assist in strategic growth, decisions to sell and developmental planning.
Seeking out a professional to complete a valuation will give you the best indication of where your business sits economically to help inform future decisions that you may need to make.
Why seek out a business valuation?
Whether it’s to gain an understanding of the businesses potential growth, or whether you want to sell your business, a business valuation will determine where your business sits economically within its industry. Here are just a few examples of why a business valuation can be a great idea:
Knowing where your business sits economically and how it can grow
By taking a step back and looking over the industry in which you operate, you’ll gain a better understanding on where your business stands in relation to your competitors and current market trends. The information that you receive can help inform strategic decisions regarding your business’s growth. This could mean adjusting your marketing strategy, updating your business plan or re-evaluating financial objectives.
Because of the ever-changing dynamic of economic climates, seeking out a business valuation annually or every few years can be beneficial in helping you understand the current position of your business and how you can grow more.
It can help inform future decisions and exit strategy planning
A business valuation can also inform the decision of whether or not to sell or when to plan your retirement.
The decision to sell and move on from your business is never simple. It’s a hard decision to make. It can be complicated and exhausting. A business valuation will give you the peace of mind of understanding the economic value of your business. Understanding the value of your business can help you plan an easy and fair exit. Furthermore, it will help you keep any information you have regarding your business up to date and well informed for the next owner.
Alternatively, you may want to sell your share of the business or buy out your partner. A buy-sell agreement is not always a smooth agreement. They can get messy, especially when there is a breakdown in communication. A business valuation can help determine a fair distribution of assets and ensure that all parties are happy with the agreement.
Maintaining relationships with financial institutions
Your relationship with your financial lender is one of the most important relationships you have. Maintaining stability, trust and transparency with your mortgage lender or bank is crucial, especially when you find yourself in financial hardship. Alternatively, you may decide to seek out an extra loan to expand your business or secure a separate one. A business valuation is often needed to procure a new loan so it’s necessary for you to understand why you may need to purchase extra security against the loan.
Financial institutions will often seek out their own valuation as well, so it’s important to have your own independent business valuation report completed to provide. Being prepared and informed is so important.
What do you need for a business valuation?
When a professional valuer begins the valuation process, they will require documents, plans, and legal information to reach a comprehensive and accurate conclusion. The more information you can provide, the easier the process will be.
Most importantly, the purpose of the valuation will be required. Whether it’s to inform the decision to sell, required by a financial institution, or for tax purposes, the purpose of the valuation will direct the valuer in collecting all information required.
Your business history helps establish the context of previous business growth as well as your business’s current standing. Has it changed hands? How successful has it been in previous years? When did the business start and how long has it been in operation? Has there been a shift in goals/strategies? All of these questions will help build an understanding of what direction the business is heading in. More importantly, your business’s background gives the valuer an indication of how it has handled economic trends while understanding its resilience in previous years.
Employees are the heart of any business. A profile of all staff can be required to gather information surrounding how the business operates. This might include staff rostering, staff contracts, pay structures and any other information that assist in understanding work culture or staff reliance.
You must provide any financial records relating to the business going back at least five years (or since its inception if it has been operating for less than five years). Cash flow statements, evidence of profit and loss, tax statements, financial loans, evidence of tangible assets and history of turnover are all documents that should be kept organised and up to date.
This information is necessary to establish the context of your business’s function and profitability.
Whether they’re tangible or intangible, your assets are the backbone of your business. Any physical assets including computers, office supplies, inventory and machinery must be catalogued. Intangible assets such as shares, or intellectual property must also be documented.
Current Market Conditions and Industry Trends
As previously mentioned, the valuer will investigate the current market and your business’s industry in order to determine its economic value. This might include its position when compared to its competitors, the industry standing as a whole, or how the market is faring – is it expanding or shrinking?
These broader factors will help place the success or the potential of your business and can help determine how the business might grow in the future.
Whatever position you’re in, a business valuation can help inform your next business decisions help redirect your strategic direction, assist in exit planning or buying into a business. If you’re in need of a valuation, then seek out an independent, renowned valuer to complete a business valuation for guidance and peace of mind regarding your business.
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