I provide two types of service:
1) Business Appraisal
2) Business Valuation
A Business Appraisal is quicker, lower priced, takes about 3-4 weeks, less comprehensive but efficient way to value a business. It is used by amicable parties wanting to understand what their business is worth, perhaps for the purposes of selling the business to another shareholder or a third party, or merger negotiations. I do these myself using my broker experience and the knowledge gained from my Masters of Entrepreneurship degree.
A Business Valuation is a very formal valuation, comprehensive, expensive, and lengthy report. It takes 8-10 weeks and is done by a Registered Business Valuer. It may be used for disputes that may end up in court such as divorce or shareholder dispute. I do this with a Registered Business Valuer who is also available to offer an opinion in court (additional fees apply).
The process is similar and is outlined below.
Business Valuation Process
A business is worth its future maintainable earnings discounted for the risk of receiving those earnings. The process of valuing a business is to establish what the future maintainable earnings will be and what level of risk there is in receiving those earnings.
There are three approaches to business valuation: 1) Asset 2) Income and 3) Market.
We tend to use Asset valuation primarily where there are expensive assets such as planes or heavy machinery, or where the company is making a loss.
We use the Market approach to find similar businesses—similar in terms of revenue, earnings, margins and geography—and calculate the value based off similar businesses.
We use the Income approach to calculate the value of future maintainable earnings discounted for risk. The income approach has two methods: 1) Capitalisation Rate and 2) Multiple of Discretionary Earnings.
The first step for both the income and market approaches is to estimate Future Maintainable Earnings. I adjust Net Profit to calculate Earnings Before Proprietors wages, Interest, Tax, Depreciation and Amortisation (EBPITDA).
Then I do some research and ask a series of questions to calculate the risk associated with the future maintainable earnings businesses.
I then apply a risk factor to future maintainable earnings to calculate Enterprise Value. I check that using various methods above and would look for a common result.
Note Enterprise Value includes equity and debt (but not cash) and is used to value a business to a third party. To calculate equity value, i.e. shareholders value, you remove debt and add cash.