8 Reasons Why Business Valuations Are Being Sought Urgently!

INTRODUCTION:

A number of years ago, a small business business valuation was most likely put towards the bottom of the list by any business owner, small business accountants and business advisors.

Over time as the number of small businesses grow in Australia, the need for owners to understand their true value has increased for a variety of reasons. As a small business accountant (Sydney and Dubbo) and with the changing world making it necessary to provide more value to clients and offer more services than just tax and compliance, the skill to provide experienced business valuations is a powerful tool to assist clients on many different levels as they strive to reach success, build growth and create wealth.

So why has there been an increase in demand?

Figure 1: How much am I worth? Photo courtesy Balmain Baz

1. due diligence

If you are thinking of buying or selling a business, an experienced business valuer will be able to provide you with a realistic value and the reasons behind the strength or weakness in value. Business valuers Sydney know where to look and what traps to be wary of when assigning a business valuation amount that is part of any due diligence process.

Valuing businesses on numbers alone and using multiples of three (a common perception) is fraught with danger. Normalising earnings before interest and tax or even selecting the correct small business valuation method is paramount to making sure you don't pay too much or sell too cheaply.

2. funding

As banks tighten their lending criteria, we are seeing more evidence that they would like to understand the business's true value before lending monies to the business owners as part of the overall lending score. A business with a solid valuation will be generally less likely to fail and will be more likely to be sold which is what a lender likes to see.

Of course, investors in a business that provide capital are in exactly the same boat. They also can determine whether they are getting a bargain or whether the asking price is too high.

Figure 2: Will you retire comfortably if you sell your business?

3. planning for sale

If you have a business and plan to sell it, it is usually better to find out what it is worth well before you go to sell. Once you understand what drives value and what a potential buyer is seeking, this gives you a good insight in what you need to do to make the eventual sale much higher.

The good news about this is the 'double whammy' effect. Improving the business means more profits along the way AND you get a higher price at the end. Improving value through better planning and cash flow (via three way budgets) is always part of any business planning process.

4. succession & estate planning

When working out how a family member wanting to take the business over could afford it, is always useful for anyone wanting to establish a viable succession plan where everybody wins. Planning well ahead and tying in with any retirement needs means assessing value and how it can be transferred in an efficient manner.

Should an estate plan include handing over the assets of a business to a loved one, it's best to know the value so you can ensure that your estate is transferred at the values equitably to those left behind. For example, leaving a property to someone and then leaving a business to another which does not have the value that one thought can lead to an unequal sharing of your estate.

Most small business accountants Sydney will want to make sure they have the correct values for assets when assessing any estate plan and how to set it up to minimise any adverse tax situations in the event of death.

5. asset protection

Asset protection is not only important but it can also be expensive. Understanding which businesses need to be protected will always come down to risk, benefits and costs. Keeping goodwill away from potential litigants as much as possible can be a very effective risk management strategy. Failure to grasp this concept is often understood after it's too late and assets unnecessarily lost when they could have been protected.

Figure 3: Protect your business assets including goodwill where the value justifies it.

6. buy-sell insurance

Getting an appropriate level of income and life insurance can depend on the business valuation or insurance companies may not insure at certain levels. A higher valuation can lead to higher coverage which maybe required due to loan exposure.

7. disputes/relationship breakdowns

Shareholder disputes or relationship breakdowns can see legal advisors seeking independent small business valuations to determine a fair resolution. Most shareholder agreements will have a clause that states when disputes are unable to be resolved, an independent business valuation is required.

8. compulsory acquisitions

As infrastructure requirements address an ever increasing population and efficiencies, governments are finding the need to acquire or provide compensation for businesses that are disturbed.

Getting an experienced business valuer will help ensure that you get the maximum compensation you are entitled to if you are the subject of a compulsory acquisition. 

CONCLUSION:

Business valuations are being sought by business owners more and more for many good reasons.

If you or your small business accountant are unsure of what your business is worth, getting a valuation done can be used for a number of viable options as noted above.