A valuation is simply a documented opinion of the value of a business. The opinion must be supported by evidence and a consistent approach at calculating the value. Typically it will detail a valuation range and a recommended midpoint or some other specific value.
Formal valuations are business valuations that comply with national (APES 225) and international (IVSC) standards and codes. These standards are based on the principles of:
Transparency of data, calculations and conclusions.
Consistent with national and international guidelines
Reproducibility by others.
Independence from related parties.
They must be documented in such a way that the same valuation outcomes can be reproduced by another suitably experienced or qualified party.
Formal valuations are typically required when third parties will make decisions based on the valuation and all assessments, information relied upon and calculations should be shown in arriving at the opinion of the value of a business.
There is no regulatory body that regulates or licenses the business valuation industry, whereas sale of real estate and other physical assets are licensed by regulatory bodies.
The value of a business is the present value of future free cash flows. The cash flows are capitalised at an appropriate cost of capital that represents the risk profile of the business. Many people will say that the value of a business is no more than what someone else is prepared to pay. This is an “English” version of the market valuation method – what is the market prepared to pay. Depending on the circumstances, other methods may be more appropriate to assess the value of a business.
We have provided more information on business valuation methodologies here.
Formal Valuation: A report that shows all information used and relied upon in arriving at an opinion on the value, documented evidence that supports the valuation, uses a secondary valuation method as a cross check to the primary valuation and clearly states the parameters that have been used to arrive at the opinion of value.
Limited Scope Valuation Engagement: A valuation engagement where the valuer is directed to use a particular method or information in arriving at a valuation or where the valuer has a limited scope in carrying out the valuation.
Informal Valuation: A report that typically contains less evidence to support the valuation and typically uses only a single method to arrive at a valuation range.
Valuation Assessment: Typically a brief valuation calculation using a single method based on broad assumptions, with limited information. Valuation assessments are typically made for internal decision making purposes and the limits of such a valuation must be clearly stated.
There are three primary ways of calculating the value of a business:
Assets method – The book value of the assets of the business. The book value can be replacement cost, market value, or some form of liquidated value.
Income methods – these include the EBIT Earnings Multiple method, discounted cash flow method or some other method that relates profits to value.
Market methods – use of comparable transactions to infer a value of your business after adjustment for key differences.
The lack of publicly available information on the sale of privately held businesses makes the market method difficult to use in some circumstances.
Most people can estimate the value of their business, but not many can show the evidence they have used or adopt consistent methods to withstand third party scrutiny. Business valuations should be conducted by experienced professional advisers.
We have provided a more detailed outline of business valuation methodologies here and have also provided an DIY online business valuation calculation guide here.
There is no legislation that specifically calls for an independent valuation to be produced, however there are a number of circumstances that require the market value of a financial asset to be reported to both the ATO and ASIC. For privately held businesses or SMEs these are typically:
Reporting of capital gains tax associated with sale of a business or equity holding.
Reporting of income derived from sale of an asset, whether this be a capital gain or other form of income.
Reporting of market value of a financial asset on the balance sheet (ASIC requires directors to issue reports that are a true and correct statement of the financial position of the company).
For companies with revenue in the range of $20m - $40m, the reporting of goodwill on the balance sheet is subject to impairment provisions and must be reported in financial statements issued to ASIC.
Some states, through the relevant State Revenue Offices, require payment of levies associated with the sale of a business asset and may require evidence to support the market value used to calculate the levy.
There are no specific licence requirements to undertake a business valuation, however the ATO, ASIC and courts expect:
Business valuation reports should be prepared by “…a suitably qualified and experienced person in relation to the asset being valued“.
An expert should use a number of methodologies to assess the value of the business.
Any business owner can make an agreement with another party to sell their business.
If a professional acts as your agent they must have the relevant licenses, which vary from state to state, but are typically regulated by the relevant state-based real estate institute. If you sell your business yourself, you must still comply with certain regulations that, depending on the state, the type and nature of the business. There are a variety of websites that assist you in this process. We are happy to provide details of these websites. The process of searching for buyers, presenting information on the business, conducting due diligence, negotiating terms and executing a sale is a complex legal process. It is recommended that professional advice should always be sought when undertaking a complex and legal process such as selling your business. There are taxation implications associated with the sale of a business. These will vary depending the state, the vendors personal taxation position and many other factors. Financial advice should be sought from a qualified and experienced tax accountant and financial planner to be fully aware of any taxation implications or requirements.
There are no pre-defined legal processes, however the typical stages include:
Confidentiality Agreement.
Information Memorandum or an Executive Summary
Heads of Agreement.
Contract of Sale.
Due diligence which includes:
Review of financial accounts.
Title searches of assets sold or transferred.
Any outstanding legal proceedings or pending judgements against the corporate entity.
Any liabilities that may be incurred by new owners.
Transfer of business names, registered names and associated brand identities or trademarks.
Notifications of relevant licensing and regulatory bodies including Australian Taxation Office, Australian Securities and Investment Commission and Consumer Affairs Victoria (Change of ownership of business name within Victoria).
Notification of creditors and debtors of any change in ownership.
This list is far from exhaustive and will vary depending on the state and industry. You should seek professional advice before making any decisions or signing any document.