Business Valuations – An Important Tool In Preparing Your Business For Sale
Preparing a business for sale takes time. And patience. But mostly time. And a lot of prior planning.
Business valuations are part of this planning process and shouldn’t be left until the last minute, right before your business hits the market. The valuation process provides significant insight into your business operations, your industry and the economic environment. By knowing this information early in the process, you can address and improve key areas of your business, determine an appropriate preparation period, and nominate a selling date that will realise the full potential of your business.
By starting early and taking a methodical approach, you can make considered and informed decisions that result in better outcomes for you and your business when it comes time to sell.
For many of us, our business is like a second home. And this means we may not be entirely objective when considering its value. That’s why it’s critical to get expert assistance when it comes to valuing your business.
Where Do I Start? Who Completes Business Appraisals?
The best place to start is with your accountant. In fact, your accountant will be invaluable throughout this entire process. Any type of business valuation is reliant on up-to-date financial information. You’ll need your profit and loss statement as well as your balance sheet at a minimum.
If you’re behind on your returns – make it a priority on your to-do list!
Include your accountant in your planning as they will need to be on hand to advise you of any tax implications associated with the sale, as well as prepare financial information such as projections for prospective buyers.
What Is My Business Really Worth?
There are several business valuation methods that can be used to determine the value of your business.
Business Asset Valuation
A (seemingly) simple way to value a business is by the Asset Valuation method.
Business Assets – Business Liabilities = Business Value
Both tangible and intangible assets are included in this calculation which can present a problem as it’s often difficult to value intangible assets such as goodwill.
This calculation also doesn’t allow for any positive or negative trends occurring in the business.
This type of valuation is good for: Businesses that are asset-rich
Valuation based on Annual Net Profit or Earnings Multiple Method
Often used as a way to compare businesses of the same size or in the same industry, this valuation method uses the earnings before interest and tax (EBIT) and calculates this with a multiplier to obtain a value. The multiplier for your industry can usually be advised by your accountant or found in industry benchmark reports.
EBIT x Multiplier = Business Value
This type of valuation is good for: Comparing different businesses in the same industry
You can also find a number of variations of these valuation methods. All valuation methods have their pros and cons, and it’s likely that your accountant or business advisor will use a combination of methods and their industry knowledge to reach an accurate value for your business.
The Other Important Aspects In Preparing A Business For Sale
Preparing a business for sale isn’t for the faint-hearted. Here are some other steps in the process to consider in addition to your business valuation.
- Prepare early
- Obtain advice about current value and state of your business
- Understand the numbers
- Make any required operational changes to improve business in readiness for sale
- Draw up confidentiality agreements so you can share information with prospective buyers
- Have factual information available for the buyer
- Investigate whether contractual agreements can be allocated to another party
- Decide on sale conditions
- Set a realistic sale price
Can A Business Valuation Be Useful For Me If I’m Not Selling?
Yes! Knowing and understanding the value of your business through an objective evaluation process can be a useful tool in many operational aspects of your business.
- Seeking Capital – Borrowing funds from a bank or seeking investor support
- Insurance Reviews – Making sure your insurance coverage reflects the true value of your business
- Business Review – Use the valuation as an opportunity to assess strengths and weaknesses in your business and adjust internal drivers where required to improve profitability.
We run workshops to help you increase the value of your business in preparation for sale. Look for our ‘Supercharge the True Value of your Business’ event here.
We give you the knowledge and power to make informed business decisions through an accurate business valuation from a Modoras Business Advisor. Make an appointment today. We’d love to help.
IMPORTANT INFORMATION: This blog has been prepared by Modoras Accounting (VIC) Pty Ltd ACN 145 368 850. The information and opinions contained in this blog is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Accounting (VIC) Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog can change without notice. Modoras Accounting (VIC) Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Accounting (VIC) Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Accounting (VIC) Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication. Liability limited by a scheme approved under Professional Standards Legislation.