If you’ve started up a small business, then you might want to know how much it’s worth. That’s where business valuations come in. This can help you get an idea of how much your company is worth. This involves looking at various aspects of your business including sales, revenue, assets and many more. Your Ivanhoe accountant can help evaluate your business when the time comes. But when is that time exactly? Today we’ll be looking at why business valuations are important, what they entail, and when exactly you should have your business valued – as well as the benefits of business valuation when looking at purchasing a business.
What is a business valuation?
A business valuation is essentially set up to put a price tag on a business. If the business was to stop all trading and have all of its assets, liabilities and stock counted then you would get the value of the business. The simplest and easiest example of this would be if a business had $400,000 in assets but $100,000 in liabilities, then the business would be worth $300,000 all up. There are various different methods that can be used to value a business, as well as reasons why you would want to.
When to perform a business valuation?
Business valuations are great for putting a value for your own business, whether you’re just curious about what your business is worth for your own personal reasons or you’re actually looking at selling and need an indicator pricing-wise. Another big reason would be the opposite end of that where if you’re looking at purchasing a business and you’re not sure if you’re paying a fair price for it.
You can perform a business valuation on the company you’re looking at purchasing to see roughly how much you should be paying. Some things to look out for are business’ with larger assets compared to some with smaller or no assets. The more assets the better the value. The assets can also be sold after acquisition which may work out better for you as a buyer anyway. The age of the company is also a good indicator as the companies that have been running the longest will generally have better-kept records and longer cash flow statements to compare in comparison to a newer company.
Different types of business valuation methods
There are many different ways you can value business’ but today we’ll just be looking at a couple of the key methods for valuing both your own business and one that you’re looking at purchasing.
- Asset-based valuation – This method is based – as the name suggests on what the company owns. This includes plants, stocks, cash, equipment and receivables. After all the assets are combined you then deduct all liabilities such as debts and payments due and you are left with the net worth of the company. It is important to note that sometimes a company has value beyond money that may or may not depend on the owners of the company and their standing in the local community. It could also be because of the location of the business. This is something to take into consideration when making a purchase.
- Capitalised future earnings method – This is the method that involves projecting a future profit figure based on past performance of the company and then dividing it by the cost of the business. Now you have the ‘return on investment’ (ROI) figure. Divide the business’ average net profit by the ROI and multiply it by 100 to gain the value of the business.
How often should you perform a business valuation?
When it comes to your own business it’s a good idea to value it on a yearly basis. One of the reasons you should have an up-to-date valuation of your business is in case anything happened to you. If you were suddenly unable to run your business, then it’ll be helpful for your family to be able to know the state of your affairs. Other reasons can include wanting to expand your business as well as getting a new partner.
Looking for an accountant in Ivanhoe?
If you’re looking for an Ivanhoe accountant, then Silverdale Consulting Group is the firm for you. With years of hands-on experience, our Ivanhoe accountants can offer a wide variety of services and advice to help you.
If you would like to know more about our Ivanhoe accounting services, then please do not hesitate to get in touch with us by calling (03) 9497 5885 or sending us a message through our website here.