Introduction to business valuation
We all like to know the value of our home. When we buy an investment property, we want to know the income (rent) and the premises’ capital growth (potential).
Business valuation is not much different. A business valuation is a prediction of the amount a business will transact (be bought or sold) for.
Whether your enterprise is established, a start-up, a service or a new product, you need to know your business’ value if you want to move forward.
You can get a business broker, such as GMO, to appraise your business if you’re looking to sell it, but there’s many other reasons that you should consider employing a professional business valuer.
Chris Milne, the director of business valuations at Jarot Business Assessments, says you’d get a professional business valuer for:
- Pre-sale advice as a second opinion to your business broker if you’re selling your business
- Pre-purchase advice
- Presale/purchase advice where a share in a business/company will be transacted
- Financial restructuring, taxation, stamp duty, accounting reasons
- Family law, asset pool division
- Dispute resolutions
- Financial planning – many financial planners are now getting their clients’ businesses valued as part of understanding the worth of this asset as part of their financial position.
When employing a business valuer, it is vital to ask their qualifications and experience. This is because what’s needed will vary for the type and size of company, and you need one who’s experienced in valuing businesses like yours.
Business valuers can come from a range of backgrounds including property valuation, business brokers and accountants. Make sure that they also have specific business valuation qualifications as well as demonstrated business valuation experience.
To increase the value of your business you need to decrease the perceived risk of running, and have the perspective of the purchaser in mind.
Some simple ways for you to improve your businesses value are:
- Be dispensable: Set-up the business’ management, processes and systems so the business does not rely on any key personnel. Small business owners often get this wrong because they’re so involved in the business. You need to be dispensable.
- Diversify customer base: Spread your customer base so that you’re not too heavily reliant on one customer providing a big percentage of your revenue. That creates a big risk.
- Spread your suppliers: If you are too heavily reliant on just a few suppliers, that presents risk. Just like with your customers, you need to diversify and spread your suppliers.
- Review payment terms: Too often small businesses don’t concentrate enough on cash flow control and their payment terms for customers is 60 days while for the suppliers is less than 30 days. That means your business is funding a lot of working capital because you’re not getting the money in quick enough from your customers to pay your suppliers.
- Premises: For how long does your lease run and how reliant is your business on being in that location. It’s another element of risk. Can you negotiate further option terms on your lease with the lessor?