There are a variety of methods used to value your business. Which of these is adopted often depends on the type of business but the most common methods are based on the profitability of the business.
More importantly there is key information that is required to develop a business valuation:
- History of the business
- How long has the business been operating?
- What is the business’s reputation?
- What are the job descriptions of all staff?
- Are there any specialist skills required to run the business?
- Is the business reliant on a few people?
- What are employee pay rates?
- Legal and commercial information
- Does the business have any long-term commercial contracts? How long are these valid for and how much are they worth?
- Does the business have necessary licences, permits and registration?
- What lease arrangements does the business have?
- Financial information
- Is the business making a profit?
- Is there working capital or sufficient cash flow?
- What has the annual turnover been for the past few years?
- Have the turnover and profit been increasing, decreasing or remaining the same?
- What tangible assets, such as machinery, buildings and equipment, does the business have?
- What liabilities, such as unpaid accounts, mortgages, does the business have?
- What is the value of the stock?
- Market information and industry conditions
- What is the short-term and long-term industry outlook?
- Will specific economic factors directly affect the business?
- Is this market growing, steady or shrinking?
- Who are the business’s competitors?
- Are there any barriers to entry?
- What is the market price of similar businesses?
- What competitive advantages does the business have?
by Scott Sharp
Scott is a Senior Accountant at Insight Accounting advice. He has a Bachelor of Commerce and is a registered tax agent. Scott’s experience covers all facets of accounting but he specialises in small businesses and SMSFs.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.