A business valuation is the process of determining the economic value of an enterprise, giving business or potential owners an objective estimate of the value of a business. Business valuations are not an exact science and valuation experts must exercise significant professional expertise and judgement when making their assessments. Business valuations have an important role in strategy and general business governance. They require a critical analysis of the business which can provide valuable insights and identify issues to consider.
Why is Business Valuation Important?
Knowing what your business is worth and what drives its value can be all important when looking to sell. Getting your business valued, ideally well before you’re looking to exit, can help you achieve the price you want.
Acquisitions and due diligence
A key principle of sound investing is that investors shouldn’t pay more for an investment than it is worth. A business valuation can provide a solid foundation for purchase price negotiations.
In both business and personal relationships, things can go wrong and disagreements do happen. Seeking an independent valuation helps to determine a value which is fair to all parties.
Understanding the value of your business is crucial to preserving and increasing its value and forms the basis of any exit strategy.
Restructuring and related party transactions
Determining the market value of your business is often an essential element when changing ownership and tax consequences can often arise. A valuation can help you restructure effectively.
Share based compensation
In many cases, Inland Revenue requires valuations to be prepared to support share-based benefits received by employees and assess the associated tax impacts. The most widely applicable and accepted valuation method is a value determined by an independent and suitably qualified valuer.
Financial reporting and taxation
Financial reporting standards and tax legislation can require fair value assessments to support positions taken. Obtaining a valuation can help to ensure you get things right.
Each business is different, there are other valuation considerations and approaches to valuing business activities and equity values. Please contact us to discuss your unique situation in more detail.
Ronit Ghaiee CA, MAF,Corporate Finance Manager, ECOVIS KGA Limited, New Zealand
Ronit specialises in business valuations, mergers and acquisitions, financial modelling and business advisory. Ronit is a Chartered Accountant and has recently completed a Master of Applied Finance qualification, where he was top of his class.
To form a valuation opinion, detailed research is completed for both the market and industry that the business operates. This is assessed with a review of the company background, strategic positioning, and analysis of financial results. Factors including risk, size, company lifecycle stage, revenue streams, customer base, governance, equity and debt structures all form part of the valuation opinion.
In simple terms, the valuation of an investment is determined by the expected annual returns to the investor at a rate of return that reflects the level of risk.
The measure of a company’s total value, inclusive of all productive fixed assets and an appropriate level of working capital is known as the Enterprise Value (EV). Several methods can be used to estimate the Enterprise Value, with the most common being:
- Capitalisation of earnings/Multiple method – Enterprise Value is estimated by future maintainable earnings multiplied by an appropriate earnings multiple.
- Discounted cash flow (DCF) method – Enterprise Value is estimated by discounting the company’s expected future cash flows at an appropriate discount rate.
- Net asset approach – Enterprise Value is estimated by the balance sheet value of net assets.
Industry rules of thumb – Enterprise Value is estimated by applying widely accepted industry valuation metrics.
Enterprise Value to Equity Value
To value the shares themselves, adjustments to the enterprise value are necessary to determine the share or equity value.
Surplus Cash is cash amounts above the level required to meet short term liabilities.
Surplus Fixed Assets are not used on a full-time basis in the business such as personal motor vehicles or excess/underutilised plant and equipment.
Debt is any loans including finance leases and shareholder current accounts.
For further information please contact:
Ronit Ghaiee CA, MAF
Corporate Finance Manager at ECOVIS KGA Limited