Business valuations – When and why will you need one

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Are you looking for investors to jump on board to propel your business in a new direction? Or are you part of a significant business restructuring to streamline and expand operations? Perhaps you are busy with succession or estate planning, or even thinking of selling your business to take on a new adventure?

The chances are that you will need to determine the value of your business! A business valuation is a process where a value is placed on a business or a business unit, based on the business’s historical and projected financial performance.

As a shareholder or business owner, it is critical to know what your business is worth when making important business decisions and maintaining an ongoing business strategy. These decisions can include evaluating or negotiating a possible sale of the business, or a portion thereof; or planning on restructuring the business by merging into an existing business or acquiring another.

A business valuation will also help when negotiating with potential investors and financial institutions to raise capital. Business worth is also vital for individuals with a direct interest in such businesses to do proper estate planning or in the unfortunate event of marital dissolution.

The valuation of a business unit is a complex affair and different methods can be used to value a business. Depending on the size of the business, its assets and industry information available, the following valuation methods can be used:

  1. Discounted cashflow – The discounted cashflow is calculated by using the expected future cashflows of the business and considering the risk that these earnings will materialise. Although the discounted cashflow is a complex valuation method, it is widely used by valuation professionals where reliable accounting records are available, especially in the SME environment where limited information for private companies is publicly available.
  2. Earnings multiple – The earnings multiple is calculated by multiplying the sustainable earnings of the business with a ratio that is comparable to similar businesses in the same industry. The ratio is calculated by using the actual financial results of comparable businesses. Although the earnings multiple is a good method to use when comparative industry information is available, it remains challenging to gather reliable financial information on businesses that are private companies and operate in the same industries.
  3. Asset value – The asset value is calculated by subtracting the liabilities from the valued assets of the business. This method is used for companies with high asset values, which hold their assets for capital appreciation. It is important to remember that it can be costly to appoint an independent valuer to revalue the assets to represent market-related values.

At some point, you will most likely find a need to place a value on your business. Do not try to figure it out on your own. Reach out to your trusted advisor to assist you with decisions where a value needs to be placed on your business – not only to maintain business strategy, but also to calculate the value of your business by using the appropriate valuation methods.

Get in touch with Christiaan Reinecke on 021 840 1600 or christiaan@asl.co.za for expert business advice.

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