Overview on Business Valuation Consulting
While making any transaction in an acquisition, disposal, or a merger or startups, the question that arises is:
- What is the exact fair value?
- What is the maximum price that must be paid?
- In the meanwhile, various stakeholders and regulators demand greater transparency via fair value reporting and also focusing on the importance of valuations.
We offer an integrated approach to help you measure analyze and prepare a report on a broad range of valuation services. We have professionals who will guide you on extensive valuation, corporate finance, tax strategy, and deep industry experience.
Business valuation is essential for the commercial success of most of the businesses. The constituent parts of goodwill and the intangible assets nearly always represent the essential assets of any company.
What is Business Valuation Consulting?
A business valuation is a complicated financial analysis that must be performed by a qualified valuation professional with the appropriate credentials. Business valuation also helps in determining the economic value of a company, which can be useful in many situations. There are several benefits of using a qualified professional, such as:
- It minimizes the financial risks in a matter of litigation.
- Minimizes the possible tax in gift or estate tax situations.
- Provides defense in audit making situation.
- It helps the owners in negotiating in the sale of their business.
Some examples where business valuation is needed are listed below:
- Selling of business due to health conditions, retirement, divorce, or family reasons.
- Whenever you need debt or equity financing for the reason of expansion of business due to the cash flow problems, in case the potential investors will want to see that the firm has got growth aspects.
- When you add more number of shareholders, or in case one or more shareholders may ask for a buyout. In this case, the share value needs to be determined.
Whatever may be the reason, performing a business valuation will help you in setting an appropriate price for the sale of the business.
What are the Reasons to Consult a Business Valuation Consultant?
One should know the worth of his business. For a company, valuation is a vital part of its ongoing business strategy. A business valuation consultant will help you in determining the following issues:
Exit Strategy Planning
In case you are planning to sell your business, it is suggested the set a baseline for the company and also develop a strategy to improve the profitability to increase the value as an exit strategy.
If you are in a partnership firm or an LLP, a buy and sell agreement between the partners can prevent future disputes. A mutually agreed value is the starting point in the deal that is acceptable to all the parties.
Shareholder or Partnership Disputes
Things always do not work out between the partners. If an owner decides to leave a partnership, an independent business valuation is essential as it will help in arriving at a fair settlement of ownership interest.
Mergers and Acquisitions
If you have planned a growth strategy, including buying or merging with another company, a business valuation will help in determining if the price that is being demanded is a fair price or not.
Determining the Annual Per Share Value of an Employee Stock Ownership Plan (ESOP).
In order to meet specific requirements, shares of the Employee Stock Ownership Plan or ESOP should be valued by an independent valuation expert (IVE) on yearly basis to establish a fair stock price.
Whenever a company negotiates with the banks, or venture capitalists, or any other prospective investors, an objective valuation will help in raising capital.
An objective appraisal can do a pretrial settlement. In case, a matter goes to a trial or arbitration, a certified valuation analyst or an expert testimony can strengthen a situation where the main issue is the valuation of the business.
Gift Tax Planning
Avoid any type of doubt with the experts having an accurate, defensible and documented value.
Nobody wants to burden their heirs on paying hefty taxes on a business that was undervalued. You must know the value of your business in order to fund a future estate tax liability adequately.
There must be a fair market value of the business interests for an equitable division of assets.
What are the Methods Applied by Business Valuation Consultants?
There are three business valuation methods used by business valuation consultants to determine the value of the company and also to evaluate its worth:
Each approach has a separate consideration, and in case you own a sole proprietorship firm there are further factors that must be considered:
Usually, an asset-based valuation will calculate all the investments in a company. An asset-based valuation is done in two ways:
- Going Concern Asset-Based Approach
- Liquidation Asset-Based Approach
Going Concern Asset-Based Approach
A going concern asset-based approach maintains the company's balance sheet, also lists the business's total assets, and then subtracts its liabilities. This is also called a book value of assets.
Liquidation Asset-Based Approach
A liquidation asset-based approach assesses the liquidation value, or the net cash that will be received if in case all the assets were sold and liabilities paid off.
Asset-based Valuations of Sole Proprietorships
To value a sole-proprietorship, using an asset-based approach is very difficult. In a corporation, all the assets are owned by a company, and are normally included while selling off the business. On the other hand, assets in a sole proprietorship firm exist in the name of the owner, so separating a business asset from personal ones can be difficult. For example, in an art studio business, the sole proprietor is using his personal property in doing the business. Here the potential purchaser of the business needs to sort out which assets the owner intends to sell as part of the business.
Earning Value Approaches
An earning value-based approach is generally based on the idea that a business's value relies on its ability to produce profits/ wealth in future. Earning value approaches is calculated in the following manner:
- Capitalizing Past Earnings
- Discounted Future Earnings
Capitalizing Past Earning
This helps in determining an expected level of cash flow for the company using a company's previous record earnings. It also normalizes them for significant revenue or expenses, and then multiplies the expected normalized cash flows by the capitalization factor. It is a reflection of the expected rate of return of a reasonable purchaser would receive on the investment, as well as the measurement of the risk that the expected earnings will not be achieved.
Discounted Future Earnings
Another earning value approach to a business valuation is discounted future earnings. Here instead of the past earnings, an average of the trend of predicted future earnings is used and is also divided by the capitalizing factor.
Earning-Based Valuations of Sole Proprietorships
Valuation in a sole-proprietorship related to past earnings can be tricky, as the customer loyalty here is directly connected to the identity of the business owner. Whether the business deals with management consulting or plumbing, the question with the customers will be whether the owner will deliver the same degree of professionalism and service. Any valuation in a service-oriented sole proprietorship must involve an estimate of the percentage of business that can be lost when the ownership will change.
Market Value Approach method
A market value approach to a business valuation is for establishing the value of your business by comparing your company with other similar companies in the market which has been sold recently. This idea is similar to using a real estate comps, or comparables to value a house. This method only works well when there are a sufficient number of similar businesses that can be compared.
Market-Based Valuations of Sole Proprietorships
Assigning a value to a sole proprietorship depending on the market value is usually a difficult task. By definition, a sole proprietorship firm is owned by a single owner, so attempting to find public information on yearly sales of similar businesses is a complex task.
Combination of Different Methods for Business Valuation
The earning value approach is the method which is mostly preferred by business valuation consultants for business valuation. It helps in setting the fairest way to calculate a selling price. For this, the first step is to hire a professional business valuation consultant. He will be able to guide you on the best method to use to set your price so that you can successfully sell off your business.
Having the Valuation Done Professionally by a Business Valuation Consultant
Entrepreneurs need not do their own business valuation. They will not have a necessary distance objective. They must contact a business valuation consultant to complete the valuation work professionally.
To guarantee that you get the best price for selling off your business, get it performed by a professional Chartered Accountant (CA) or CMA. You can contact Enterslice to get the best advice related to valuation work. We have expert business valuation consultant.
A non-competition clause is generally included in agreements for the sale of a business, particularly in cases where the goodwill forms a significant part of the valuation. While purchasing a business, no one wants the current customers to support the business of the previous owners, who immediately open a similar business in the same area.
Non-competition clauses typically contain certain restrictions such as:
- Prohibiting the seller to open a competing business in the same geographical area.
- Also, placing a time limit restricting the seller from making direct competition in the market, say for a period of five years.
A non-competition clause is usually a legal issue and is often a matter of court cases between the buyers and sellers after the business is sold off. From a legal point, the mentioned restrictions in a non-competition clause must be clearly defined and 'reasonable.' The court can nullify the Non-competition agreement if it is satisfied that the enforcement is placing any type of unreasonable restrictions on the seller's ability to continue his trade or to earn a living.
Non-competition clauses must be reviewed by the legal representatives of both the buyer and the seller before the sale of the business.
Business Valuation Advisory Services
Our specialist, business Valuation team, can draw upon expertise from across the firm, as well as having many years of experience in performing valuations, to provide a high-quality output. We can conduct assessments and assist in connection with the following, for all the types of businesses:
- Business Valuations for commercial or strategic purpose.
- To provide independent valuations for shareholders disputes
- Any fiscal and share asset valuations including taxation.
- Independent valuations for matrimonial or litigation proceedings.
- Share option valuations.
- Intangible asset or intellectual property valuations, including the purchase price allocations.
- Financial reporting support for impairment review.