What makes a fast business valuation?
Updated: Jun 8, 2019
A business valuation must follow a process to reach credible and accurate conclusions. A fast business valuation is no good if it is wrong. The time it takes to complete a business valuation depends on the information available and the purpose. We outline how a fast business valuation can be delivered and how you can help the valuation expert.
Technology has influenced many professions, and business valuation is no exception. Business valuation reports can be delivered online as fast as the information can be loaded, they can be delivered by accountants, lawyers and other advisers and they can even be continuously provided by financial software that automatically imports the required data.
How long should a business valuation take?
This will always depend on the purpose of the valuation and the accuracy required. There is a common saying about service:
You have your service fast, cheap or high quality - pick any two.
The broad range of delivery options for a business valuation are:
An almost instant valuation assessment can be provided by online software based on information you enter.
A similar outcome can be gained from downloading a valuation calculator spreadsheet and with some "google research" you could get an answer within minutes or hours.
A broad assessment can be provided from a 1 hour phone call or face to face interview (we offer this type of service - see our links at the end of this blog article).
An informal valuation (usually called a valuation engagement) can be completed within 3 - 5 business days, but will have limited use to third parties.
In most cases a reasonably detailed business valuation can be completed in 2 - 4 weeks.
An extensive business valuation related to a complex legal matter can take longer and will depend on the information available, the complexity of the
The time a business valuation in general will take depends on:
Extent of information available (both business information and market transaction and industry data)
Quality (and credibility) of information.
Complexity of the business structure and business model.
Purpose of the business valuation.
We have found that in many cases getting reliable information often delays the business valuation process, especially when needing access to the year to date accounting data.
Why do you need a fast business valuation?
Business valuations are primarily required to support a transaction, a commercial dispute or a management decision.
A transaction for most businesses rarely happens overnight - and if it does then often the first step is to spend an hour with a business valuer and get some broad advice that can at least help you say "yes this is a good deal" or "pass".
Otherwise the size of the deal should give you an idea of how accurate the business valuation is required. A transaction that is likely to be greater than $200k then it is worth spending a $2,000 - $4,000 to get a reliable guidance.
Where the amount at stake relates to the ongoing future of the business, such as in a commercial dispute, then having a reliable and defendable valuation is arguably more important than the price.
In general the more "legal" the purpose for a business valuation, the longer it takes. When a valuation report must be circulated between multiple third parties, scrutinised and challenged, it is important that the business valuation process is not circumvented to get a quick result. In these cases it is better to have a reliable and defendable valuation outcome rather than a fast and broad assessment.
What takes time in the business valuation process?
The broad steps in any business valuation are shown in the diagram below.
Understanding and documenting the scope and parameters of a business valuation usually takes 1 - 2 hours, after suitable discussions with the client and any related parties.
In most cases data collection can happen within 1-2 days. We often find that the year to date financial information is not readily available and can add some time awaiting up to date information.
We use data analysts to enter the financial information into our analysis model and document initial business analysis observations. This means we can often complete this part of the analysis within 24 hours. We also complete preliminary profit and loss projections, that are based on information provided in the discovery interview.
We undertake a discovery interview with the client to ensure we understand the business background and any necessary assumptions we must make during the business valuation. We usually allow a full day to complete the interview and transfer any learnings or data into a draft report format. This stage typically takes 1 - 2 days.
The time we often find takes longer is collating transaction and industry information that that informs our opinion on business value. In some cases this process requires further discussions with the client to make sure we have understood the issues and concepts correctly, and that this feeds the into our valuation assessments
Depending on the complexity and size of the business, we then take 1 - 5 days to assemble all the necessary information, coalesce our opinions and document the outcomes and conclusions. At this point the report is considered a draft and we undertake two key steps:
Seek client comment on the accuracy of any information and the assumptions relied upon.
Review the report for correct calculations, consistent methodology, reasonable conclusions and evidence required to support report outcomes.
This last stage can take 1 - 3 days, depending on the extent of feedback and changes required.
All up a formal business valuation can take 8 - 12 business days depending on size of the business, complexity and availability of information.
We can produce informal business valuations in 5 - 7 business days which uses only a single business valuation method, reduced business analysis and does not include an industry or market review. This valuation is typically called a business valuation engagement under the APES 225 Code of Practice.
Can I use a rule of thumb for a fast business valuation?
Rules of thumb are typically approximations that make certain assumptions that make it easy and quick to calculate the value of the enterprise. In almost all cases it determines an enterprise value and not the value of the equity of the business structure. Typical rules of thumb are a multiple of revenue, or in some cases a multiple of assets.
For example, the valuation of a rent roll is often a multiple of the net annual rent income and makes certain assumptions about the costs of this business. Funds management businesses are often valued as a multiple of funds under management - again making assumptions about the costs of the business.
Rules of thumb exist for accounting practices, dental and pharmacy businesses and some mortgage broking businesses.
Rules of thumb are not considered reliable for use a primary valuation method. However it can provide a cross check against other methods, and in some broad cases it can be used for a broad valuation guidance.
How reliable is a business valuation calculator?
Online valuation calculators can be very useful. They typically use a basic income method for valuation (usually some form of the earnings multiple method) and rely on a commercial profit being generated. They usually include broad earnings multiples, and some segmentation by industry.
They will provide a generally useful guide to business value, however they should not be relied upon for any third party dealings.
Some online valuations are prepared by an experienced business valuer and they generally use software to speed up the process. These business valuation reports can be as reliable as the valuer completing them. We have seen some that are very complete and consistent with best industry practice, whilst others are often lacking in detail.
We have also documented an online business valuation guide - which you can follow to arrive at your own assessment. There are some limitations, which are explained in the downloaded guide, but under most circumstances you can get a broad assessment of business value.
Can a business broker provide a fast business valuation?
Business brokers have access to large databases of transactions which provides a very reliable measure of market value. There are some business brokers that have training and experience in conducting formal business valuations, which means they can be very reliable and accurate.
However, in some cases the broker does not have the knowledge or experience where legal disputes or commercial law issues require a market valuation. In some cases we have noted that the use of a market transaction resulted in a business valuation that was several orders of magnitude higher than other business valuers determined. In this case there were circumstances that meant the market method was inappropriate.
Business owners should be aware that the business valuer has sufficient experience for the purpose of the business valuation.
How can the client speed up the business valuation process?
There are some general ways you can speed up any business valuation and they include:
Have required financial reports (profit and loss and balance sheets) available - especially in an Excel spreadsheet format.
Have year to date management reports available in an Excel spreadsheet format.
Provide written description of the business and answers to some standard questions.
Have the documents in our business valuation checklist ready in some electronic form.
Provide prompt response to feedback or questions raised by the business valuer.
Some business valuers can provide a faster service for an additional fee. The basis for this is that the additional fee covers prioritisation of resources.
Another option that can be offered is to undertake an informal valuation (delivered quicker than most formal valuations) which is upgraded at a later date for an additional fee, as required.
How can you get a quick valuation assessment?
If you have a valuation matter that does not require a formal business valuation report, then we provide a basic valuation assessment over a face to face meeting or a phone or Skype call. You need to provide:
the last two years of financial statements (profit and loss and balance sheet).
the latest year to date management reports from your accounting software(profit and loss and balance sheet).
Over a 1 hour interview we collate the broad information we need to and provide a verbal assessment at the end. A basic 1 page report is provided within 1 business day of the interview.
This valuation makes some very broad assumptions, and in some cases is not appropriate for any formal valuation assessment. The range of the valuation result will be at least plus or minus 25% and is considered general advice and should be supported with additional expert advice.
If you want to know the value of your business and a detailed assessment then give us a call and discuss our business valuation process and the benefits it will deliver.