When do you need a business valuation?

West Carr & Harvey are often called upon to provide business valuations for a variety of reasons.

When might you need a business valuation?

1. Changes in ownership or commercial arrangements
If you are planning to sell part of your business to key employees or management a valuation is a useful report to assist in determining an appropriate price for the agreement or starting point for negotiations and can also assist with investor agreements.

2. Family Law division of assets
Marriage separations typically require valuations of all assets (both personal and business) before legal agreements can be finalised. It is important to have this information to ensure that all legal proceedings will be carried out in a fair and equitable manner.

3. Tax based valuations
When looking to restructure/apply certain tax concessions, the Australian Taxation Office (ATO) have certain requirements regarding what constitutes ‘market value for tax purposes’. Business valuation reports can be prepared for this purpose and will need to include all relevant information to ensure compliance with ATO guidelines.

What is the difference between tangible assets and intangible assets?

Assets can be tangible or intangible (including goodwill):

1. Tangible assets
As the name would suggest, tangible assets include things like cash in the bank, receivables, the fixtures and fittings, plant and equipment and stock on hand. Generally, tangible assets can be straightforward to value.

2. Intangible assets
Intangible assets include things like brand recognition, business name, customer databases, market niche/competitor advantage. While these types of intangible assets are highly valuable, they can be a little more challenging to value. What we can put a value on is the associated success of the business based on these assets. This includes a history of profits and reassurance of ongoing cashflow.

What methods are used for calculation of business value?

Typically, there are two key methods to calculate the value of a business for most SMEs. These are the capitalisation of future maintainable earnings (a profit method) and the fair value of net tangible assets (the net assets method):

Profit method

This approach uses the historical performance of the business, to predict future earnings of the Business.

Once the estimated future maintainable earnings are calculated, we then use a multiple factor (adjusted for features such as risk, consistency of earnings, industry factors, etc) to calculate the value of the Business.

Assets method

This method typically uses the market value of all assets and liabilities of a business and entity and adds them all together to calculate a single business value. Under both methods, but particularly this valuation methodology, it is important to identify all assets and liabilities, including employee leave entitlements.

If you have any questions about this process, please feel free to contact us.