How is a business valued?

Start with the question being answered

Before asking “what is it worth?”, establish what is being valued. A business sale, a transfer of company shares and the exit of one shareholder can require different work. The valuation date, ownership rights, intended use and any relevant agreement need to be clear.

For example, asking what a buyer might pay for an operating business is different from asking what a particular shareholding is worth under a buyout agreement. The same financial statements do not make those questions identical.

Which valuation methods are used?

There is no single method for every business. An assessment may draw on earnings or cash flow, market comparisons, assets, or more than one approach. The method needs to suit the business and the quality of the information available.

The Australian Government’s guide to valuing a business also explains why the information, method and business circumstances matter.

What are adjusted earnings?

Adjusted earnings are a measure of profit after considering items that may not represent the business on the basis being valued. Each proposed adjustment needs an explanation and supporting records.

Consider an owner who handles sales and operations. Adding back all of that owner’s pay without allowing for the cost of replacing their work could overstate earnings. The question is what the business would need to spend under the valuation assumptions.

A practical review asks: what happened, why is an adjustment appropriate, does it recur, and what evidence supports the amount? An expense does not disappear from the analysis simply because an owner calls it “one-off”.

A simple example: operations versus shares

This is a hypothetical illustration of arithmetic, not a valuation of a real business. The multiple is assumed solely for the example and is not an industry benchmark or a recommended multiple.

This simplified example assumes normal operating working capital is included, the cash is genuinely surplus, and no other adjustments are required. Real work must consider the actual assets, liabilities, valuation basis and transaction terms. A particular shareholding may also require separate analysis of its rights and restrictions.

What should a valuation report explain?

A reader should be able to identify the subject, purpose, valuation date, information relied on, methods, material assumptions and conclusion. They should also understand the limitations and who may use the report.

Before commissioning work, ask who will prepare and sign it, what information is required, and whether the report is suitable for the intended recipient. An estimate for an owner’s planning is not automatically suitable for an agreement, tax matter or court proceeding.

Explore our signed business valuation service, fees and timeframes, and information checklist.

Discuss a business valuation in Sydney

Valuation Group is based in Double Bay, in Sydney’s Eastern Suburbs. Tell us the business, purpose, relevant date and deadline. We will discuss suitability, scope and a fixed fee before commencement.

Standard signed valuations start from $1,495 + GST for suitable matters. Family law expert engagements and complex work require separate scoping. Speak with Jackson Wilson about what you need.

General educational information. Examples are hypothetical and do not value a real business. The appropriate treatment depends on the purpose, evidence and agreed scope.