What is a business valuation?
Business valuations are an integral component of the Australian economy and the financial industry. They are core to various legal proceedings, strategic planning, investment, mergers, acquisitions and more. Licensed business valuers in Melbourne conduct valuations in order to identify the fair market value of the entity in question.
These investigations are based on factors such as:
- financial performance
- assets
- liabilities
- market trends.
Compiling these factors into one extensive process of financial and market analysis requires specialised knowledge and skills. This includes a detailed understanding of finance and operations across numerous industries.
Business valuations can be conducted for the likes of IT companies, law firms, restaurants and more.
Each service is tailored to the needs of the client, as well as the industry they operate within. For the most part, valuations consist of a combination of three methods: the income, market and asset-based methods. Each has its pros and cons and is more or less appropriate in different scenarios.
Aside from methodologies, business valuation should also be conducted in compliance with various guidelines and regulations. For example, valuations for tax purposes must be done in accordance with the guidelines set out by the Australian Taxation Office (ATO).
The benefits of a business valuation
By establishing fair market value business valuations form a crucial part of many aspects of business operations and decision-making. This form of reporting can provide many tangible benefits to investors, business owners, management and other key stakeholders.
Regardless of the purpose of your business valuation, gaining a concrete understanding of your company’s worth is always beneficial. This can be used to secure funding, navigate mergers and plan for the future.
In terms of the latter, the valuation process will identify key areas for growth and improvement that can be leveraged to make sound investments. These investments can ultimately serve to increase the value of the organisation being valued.
Valuations also support informed investment decisions by providing vital insights into the financial health and potential of a company.
Another benefit of an independent business valuation is ensuring compliance with tax regulations and avoiding the potential legal ramifications of non-compliance. Valuations can be conducted to calculate the likes of estate tax, capital gains tax and stamp duty. In terms of general compliance, these benefits apply to financial reporting as well.
Valuations can assist with succession planning by providing critical information used to develop an exit strategy and plan the transfer of ownership to the appropriate parties.
What is a business valuer?
Business valuations are conducted by certified professionals who have specialised in estimating the value of a company. Typically, valuers hold the qualifications of business consultants, accountants or financial analysts.
Areas of importance for a business valuer include:
- financial modelling and analysis
- market research
- industry knowledge.
Valuers are also required to gain practical experience in the methodology of valuation.
In Australia, the guidelines and regulations that govern business valuation are maintained by organisations such as the Australian Property Institute (API) which developed the Australian Valuation Standards (AVS), as well as the Australian Securities and Investments Commission (ASIC).
In order to practice business valuation professionally, valuers will also need to be trained graduate members of bodies such as the API, Institute of Chartered Accountants in Australia (ICAA) or Institute of Public Accountants (IPA).
These institutions provide opportunities for ongoing professional development that allow their members to remain abreast of the latest techniques and trends.
Moreover, they ensure business valuers adhere to strict ethical and professional standards. This is why a business needs to partner with qualified, experienced and independent valuers.
How is business valuation different to property valuation?
The primary differences between business and real estate valuation are the nature of the assets being valued and the methods used to value them.
Both forms of analysis aim to uncover market value. However, business valuation is based on the future potential earnings and cash flow of the company. Methods for determining this include the discounted cash flow method, comparable company analysis or precedent transactions analysis.
Real estate valuation, on the other hand, is based more on the reputation of the location, as well as the building’s physical condition.
A key difference between the two forms of valuation is the impact of intangible assets. For instance, business valuations consider intangible assets such as patents, trademarks and brand recognition. Real estate valuations are based primarily on tangible assets like physical characteristics.
Another important difference that valuers must consider is the legal and regulatory environment.
Real estate is subject to development and zoning regulations. These can have a notable effect on value. For businesses, value can be affected by taxation, corporate law and market competition.
Summary
Business valuation is a complex analytical process designed to uncover the market value of a business. They can be conducted across all industries, for businesses of all kinds and all sizes. These calculations are based on a company’s operational and financial performance.
They can be used to buy and sell an organisation at a fair price, calculate various taxes, support mergers and acquisitions and more. This makes a legally certified valuation report crucial for business owners, management and various key stakeholders.
These valuations should be conducted by qualified, independent professionals.
The process is overseen by numerous official bodies that enforce strict standards for quality, transparency, accuracy and objectivity.
For a free quote on a business valuation service, contact one of our licensed valuers.