Business valuation process

Business Valuation Process

Why is the business being valued.

The first step in the valuation process is to determine the reason the valuation report is for. Shareholder disputes and minority interest valuations may also vary from the common valuation process. Quite often a family law valuation will use a different valuation approach than a business being valued for sale.

Gather the information.

The financial information is paramount to most business valuations, whatever the end purpose

3-5 years of income statements and balance sheets is ideal. If the business property is leased, the lease agreement is needed as well as any agreements or contracts the business has with clients. The information required depends on the scale and ulitmate use of the valuation. Public company valuations require extensive information, whereas a small sole trader business requires less.

Recast the financials.

Most small to medium businesses are run by their owners to minimise taxable income. To determine the actual profitability of such businesses, the financial statements need to be adjusted. An add-back schedule will allow a prospective purchaser and their financial adviser the ability to recognise the actual operating profits of the business before personal expenses and salaries of the business owners.

 Choose the business valuation approach.

Most known business valuation methods fall under one or more of these fundamental approaches:

Asset approach

Income approach

Market approach

For a family court valuation a "Value to owner approach" may be used.

Apply the business valuation approach

Once the data has been assembled and the business valuation approach chosen, the result should produce an accurate, concise  and easily justifiable results.

It is sometimes prudent to cross-check the  assumptions but utilising one or more approach. Some valuation methods utilise all the methods and then weight each result.

The business value conclusion

The resulting report should explain the processes and justifications that have been applied to the valuation, culminating in a valuation report  is applicable and pertinent to the reasons for the valuation.




Ready to find out more?