How Will a Valuer Assess a Business’s Market Value?

Written by Darren Van Zyl
March 15, 2024
Share this

TAGS:
Business Value, Valuations, value, Valuer process

For business owners eyeing the sale or merger of their business, having a foundational understanding of the business valuation process is not just beneficial—it’s lucrative.

Knowing how a valuer will assess your business will empower you to make strategic decisions that may increase your market value.

Elements Advisory Group partner Darren Van Zyl delves into this critical topic, aiming to equip you with the knowledge to navigate the valuation processes successfully.

Watch the video below to understand the fundamental components a valuer will likely consider when completing a valuation on your business.

Valuation Methodologies

A common misconception is that owners can accurately value a business at just 3 times EBITDA. Think again.

Valuations are not one-size-fits-all. They involve various methodologies such as:

  • Discounted Cash Flow
  • Capitalisation of Future Maintainable Earnings
  • Earning multiples from comparative sales

Relying on oversimplified valuation formulas can result in overestimating or underestimating your business, which could result in a giveaway deal.

Determining the Market Value

A valuer aims to determine the business’s ‘market value’, the estimated selling price in a fair market. It is what an informed buyer would pay an equally informed seller.

Why is this important?

Many owners mistakenly factor their personal ‘sweat equity’ into valuations, which can significantly differ from the market’s perspective of the business’s value.

Historical Normalised Profitability

One of the fundamental drivers of value is profitability.
A low or no profit history usually results in a low valuation outcome.

Valuers focus on genuine profitability, excluding one-time income items like government subsidies and adding normalised expenses like a market-rate director’s salary.

This is important because a profitable business only because of non-recurring income or unaccounted-for salaries can lead to an unexpectedly low valuation.

Capital Reinvestment Requirements

Capital expenditure (CAPEX) occurs when funds are used to acquire, upgrade, or maintain assets.

CAPEX is another fundamental driver of a valuation. It typically enables a business to grow or increase future economic benefits.

This is important because if a business requires significant ongoing reinvestment to sustain or boost profits, a valuer will likely adjust the valuation to account for this expected level of reinvestment.

Prospects of Growth in Profitability

Valuers can’t predict the future but can look for indicators that a business’s past performance will continue or improve.

Buyers invest for future profits and growth to achieve a return. So, providing data that increases the likelihood of growth and sustainability of profits will positively impact your valuation conclusion.

Business Specific Risks

As a final component, a valuer will assess risks that threaten a business’s future prospects of growth and profitability, such as:

  • Over-reliance on a single person for financial success (i.e. the owner)
  • Dependence on one revenue source (i.e. more than 40% of revenue is derived from one customer
  • Or loose customer contract terms that may allow customers to walk away from orders or projects easily.

Reducing these risks is important because businesses with lower risk profiles often command higher valuation multiples, enhancing their value.

Get a Professional Perspective

Valuations transcend the simplistic “multiple of three” rule and evolve as businesses grow and mature.

Instead of taking a DIY approach, owners should integrate core valuation principles into their strategies and seek advice from a valuation specialist. A good valuer will provide a more accurate assessment that will provide a more unbiased and accurate estimate of market value.

Whether you’re buying, selling, reshaping your business structure or resolving owner disputes, our team of experienced business valuation specialists are here to guide you and help you understand the true market value of your business.

We provide accurate and comprehensive valuation reports that clearly and concisely communicate key value drivers, assumptions, and normalisations.

If you want to know how we can help you, contact us at admin@elementsag.com.au or call 07 3878 9181.

Subscribe to our newsletter.

Learn

Related insights

The firm

About us

Our team

Careers

How we help

All services

Business Advisory & Valuation

Bookkeeping & Management Accounting

Insights

Articles

Events & Webinars

Free Resources

Our clients