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TEN questions you must ask when you do a business valuation 1) What are you valuing?Is it the shares in a company, the “assets” (plant, intangibles and stock) which is the way 99% business sell, or is it a part interest? 2) Why? What is the purpose of the valuation? Buy/sell decisions, tax/estate planning, partnership or marital splits, litigation support etc. 3) Which standard of value? Fair value or fair market value? A particular standard may be mandated. 4) When? If the “as of” date is different to the present one then the appraiser can only take into account facts that were known, knowable, or reasonably foreseeable at the “as of” date. 5) What is the key information of the business? History, operational details, staffing, tenure, customers, suppliers, processes, location, etc.etc. Full information will unearth the value modifiers. 6) What risks does the business face? Competition, loss of key staff, loss of major customers or suppliers, technological or legislative changes, economic conditions. 7) What intangibles drive productivity and profitability? These need to indentified and assessed for transferability. They will range from rights and contracts to relationships, client databases, and personal goodwill. 8) How “honest” are the financial accounts? For almost all SME the financial accounts will include “one-offs” or discretionary expenses that are not strictly necessary for the production of income – so will need to be re-cast or “normalized”. And what are the trends? Historic figures are no guarantee of future performance. 9) Which are the appropriate valuation methods to use in this case? Asset-based, market-based and earnings-based approaches should all be considered. Ideally two or three different methods will be applied as a check for your answer. 10) What does the market say? All valuations are opinions. The only true test of value is an arms-length sale on the open market. Transaction data from actual sales of similar businesses provides a valuable guide. BizStats™ supplies valuable guidance for many business sectors. Is the business saleable? For defensible valuations curiosity may be more important than calculations and a price range more accurate than a precise figure. |
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