It is a question that, at some point in time, business owners need to ask themselves. A lot of small businesses are established simply to earn an income for the owner/operator and when it comes time to call it quits, the business is not intended to be sold. But for many others, they are established and run with an ultimate sale in mind. We have published articles on how to get your business into the best possible position for sale but at some point you really need to know, “What is my business worth?”
Unlike many other investments such as shares where there is always an active market and the value can be readily determined, it is often necessary to engage an expert to determine the market value of a business.
Reasons for valuation
The final sale of your business is not the only reason why a valuation is required. Some of the most common other reasons are:
- Transfer of equity between partners
- Admission of an additional owner
- Assessment for family law purposes
- Insurance requirements
- Complying with ATO restructuring requirements.
The valuation process
It is important to understand that the valuation is an opinion as to the business’s worth and is therefore subjective. However, for it to be admissible in court or be accepted by the ATO, it will need to be governed by professional standard APES 225 which requires the valuer to gather certain information and to determine the risk profile and the expected future income of the business.
The valuation process involves obtaining information from the current and previous financial reports, as well as asking questions about the business and the way it operates. It also requires the estimating of expected future profits, an understanding of the roles of the current owners and an estimate of the value of the services that they provide.
At the end of the process a valuation report will be produced showing the valuer’s estimate of future profits, an assessment of future risks to the business and a summary of the methodology used to determine the valuation. A well reasoned and documented valuation opinion will generally be accepted by the ATO and courts as a fair market value.
Is it time for a valuation?
If you have never had your business value determined, maybe it would be worth considering it now even if none of the above situations are pressing. We recommend that the value of your business be assessed every 3 to 5 years so that you fully understand what your future nest egg is really worth. It could affect your forward planning dramatically, one way or the other.