If you’re a business owner, investor, or someone planning to buy or sell a company, you’ve probably heard the term business valuation. But what exactly does it mean? Business valuation is the process of determining a business’s value. This process is necessary for making proper decisions, planning for the future, or preparing for significant changes, such as mergers, acquisitions, or investments. JAKS provides business valuation services in partnership with CA and CPA firms, helping businesses grow smoothly and confidently in today’s competitive market.
What Is Business Valuation?
Business valuation is the process of determining a business’s economic value. It helps you fully understand your business’s current market value, which can depend on many factors, including profits, assets, debts, reputation, and future growth potential.
Why Do You Need a Business Valuation?
There are many reasons why you need to know your business’s value. Here are some everyday situations:
1. Selling the Business
If you plan to sell your company, valuation helps you ask for a fair price. Without it, you might underprice or overpriced your business.
2. Buying a Business
If you’re buying a business, knowing its value protects you from overpaying for it.
3. Bringing in Investors or Partners
Investors or new partners will want to see a clear and professional valuation before putting in their money.
4. Mergers and Acquisitions
If two companies plan to merge or acquire each other, valuation helps determine the terms of the deal.
5. Retirement or Exit Planning
Business valuation is important when you’re planning to step down, retire, or transfer ownership.
6. Tax or Legal Purposes
Valuations are often required during divorce proceedings, estate planning, or shareholder disputes.
What Affects the Value of a Business?
Business value is not based on just one factor. It’s a mix of many things:
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- Profits and Revenue: Generally, more profit means a higher value.
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- Assets: It includes equipment, inventory, property, and cash, all contribute to a company’s overall value.
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- Liabilities: These include loans, pending payments, and debts, which lower the value.
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- Customer Base: A loyal customer base increases the business’s value.
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- Brand Strength: Strong branding and goodwill increase the market value.
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- Industry Trends: If your industry is growing, your value may be higher.
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- Management Team: A skilled team adds value by ensuring smooth operations.
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- Location: In some industries, where you operate, can increase value.
Different Methods of Business Valuation
There is no single method for valuing a business. Experts choose the right method based on the type of business and the purpose of the valuation. Here are three common methods:
1. Asset-Based Valuation
This method looks at what the business owns (assets) and subtracts what it owes (liabilities).
Formula:
Business Value = Total Assets – Total Liabilities
It works best for companies that have multiple physical assets, such as factories, land, or
equipment.
2. Income-Based Valuation
This method primarily focuses on the income, which is the amount a business is expected to earn in the future. A popular version of this is the Discounted Cash Flow (DCF) method, which calculates future earnings and adjusts them to today’s value. This is ideal for companies with stable profits and predictable cash flow.
The Future Maintainable Earnings (FME) method is a common income-based approach used to value businesses with stable profits. It estimates the value based on the company’s future earnings that it can consistently maintain. FME is ideal for small to medium-sized businesses, offering consistent performance, and is widely used in valuations for sales, tax planning, and partnerships.
3. Market-Based Valuation
Market-based valuation estimates a business’s value by comparing it to similar companies that have recently been sold or are publicly traded. This method relies on industry-specific multiples, such as:
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- Price-to-Earnings (P/E)
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- EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortisation)
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- Revenue multiples
This method is beneficial when there’s enough market data and is often used in sectors with active M&A activity or well-established valuation norms.
When Should You Get Your Business Valued?
Many business owners wait until they plan to sell, but valuation is useful in many situations:
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- When planning to expand or bring in partners
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- When applying for a business loan
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- During legal disputes or partner exits
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- When offering shares to employees
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- For regular checkups of business performance
It’s a good idea to perform a valuation every few years to monitor the health of your business.Handling a business valuation on your own can be overwhelming, especially if you’re not familiar with the numbers. That’s where a professional partner like JAKS can help.
At JAKS Australia, we help CA and CPA firms—as well as business advisors—by providing expert support with business valuations and transactions. Our goal is to make your work easier by giving you clear, accurate, and on-time valuation reports for mergers, acquisitions, or other business decisions. We understand Australian rules and market trends well, and we work as part of your team to help you give smart, reliable advice to your clients.
JAKS helps to make complex valuation work simpler for your firm, so you can focus on delivering high-value advice to your clients. Get in touch with us at +61 402 554 052 or email [email protected] to find out how JAKS can support your team.