Business owners often have a rough idea of what their business is worth, but this is not likely to be entirely accurate.
If you're planning to sell your business, need to create a shareholder agreement, or want to purchase life insurance, you need to have a clear and accurate business valuation.
A business valuation accountant can help you understand the value of your business. Discover all the ways a business accountant can help you reach your goals.
Can an accountant give you a business valuation?
Yes, a good business accountant can provide business valuation services for you. Business valuations are complex and there are a few different ways to approach them, so you need to choose the right accountant.
Business valuations are usually done as part of succession and exit planning, so you need to choose an accountant who is properly qualified to provide business advisory services as well as other business accounting.
Factors which impact a business valuation
Ultimately, your business is only worth what someone is willing to pay for it. This means that part of your valuation will be how attractive your business is to potential buyers. Some of the factors which impact the attractiveness of your business include:
1. The number of business owners
The more people who own the business, the less attractive it typically will be to potential buyers. This is because more owners could make it difficult to know who does what, and it usually means the sale process will be more complicated.
2. Time the owners spend running the business
If the owner or owners spend a lot of time running the business, it will be less attractive to buyers. This is because buyers want a business that runs itself, so there is a risk that the business will not perform as well without the original owner.
3. The quality of systems and procedures in place
Similar to point two, having efficient and effective processes in place will make your business more attractive. This is because buyers can be confident that it will continue to run smoothly after the purchase and continue to scale.
4. The amount of time left on the lease
Having a lot of time left on the lease is typically more attractive for buyers. This is particularly important for hospitality and retail businesses since the business will be less valuable if it has to move premises after just a few years.
5. Business growth over the last few years
A business will be more attractive if it can show a steady growth rate over the past few years. If your business has been growing consistently for a few years, a buyer can be confident that it will continue to grow after the sale.
Business valuation methods
When you need business valuation services, it's worth having a basic understanding of the different methods used. Your business valuation accountant may use one or more of the following methods to come up with a valuation:
1. Profit multiple
One method for calculating your business value is to multiply it's annual profits, often by a factor of three. This means that a business with $500,000 annual profits will be worth $1.5 million when sold.
A business valuation accountant will determine what multiple is appropriate for your business based on your industry, your business, and the factors mentioned above.
2. Discounted future earnings
This is useful for calculating what the business is worth today. This is done by considering the expected future earnings of the business and discounting them back to calculate the net present value (NPV).
This method is mostly used for mergers and acquisitions, where future earnings are extremely important.
3. Return on equity valuation
This method calculates the value of your business based on the amount of money the buyer should pay to receive a suitable return on their investment.
Preparing for a business valuation
Your business valuation accountant will be able to guide you through the process of calculating the value of your business. However, there are a few things you should do to help you prepare for your business valuation services.
Questions you should consider
These are questions that your business valuation accountant will likely ask you, so it's worth considering them now so that you have the information ready. These include:
- How long has business been running?
- Who is your target market?
- What are your growth prospects?
- How many owners are there?
- How much time do the owners spend in the business?
- What is the current business structure?
- What have similarly sized businesses in your industry sold for?
Numbers and documents you should prepare
You will need to have all your relevant financial information ready for your business valuation accountant, including:
- Your profits for the last 3 years
- Your profit and loss, cashflow, and balance sheet
- How much equity you have
- The growth rate of your revenue and profit over the last 3 years
- The length of your lease
- Any tax payable with the ATO
Improving the value of your business
If you need business valuation services as part of your preparation for selling your business, you need to consider how you will maximise the value of your business by making it as attractive as possible to potential buyers.
Business advisory services can be invaluable when you're preparing your business for sale. A good business adviser can help you put the right processes in place to improve your profitability, making your business more attractive to buyers.
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