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Do you know how much your business is worth? A valuation can provide a sound foundation for growth as well as help you to get the best possible outcome from a future sale or merger. Greg Hayes, Chairman of Hayes Knight National Group, explains how.
Many business owners wait to find out what their business is worth until they’re selling, restructuring, working on a succession plan or are involved in a property settlement. But a valuation can also be the first step to growing a business.
“If you have plans to sell or take part in a merger, it’s best to start planning at least three years ahead,” says Greg Hayes, Chairman of Hayes Knight National Group and author of A practical guide to business valuations for SMEs. “Potential buyers or partners are looking for trends – they want to see figures for a number of years. A valuation is a good starting point because, once you have a base figure, you can work on a meaningful strategy for increasing and documenting that value.”
A valuation can help you identify what’s creating or holding back value in your business – how you can develop its strengths and reduce its exposure to risk. “After a valuation, most businesses can identify four or five options for building value by increasing revenue, improving margins or reducing costs,” says Hayes.
While there are over 20 different valuation methodologies available, just five are used in more than 95 percent of SME valuations.
“It’s part of a professional valuer’s job to identify the most appropriate,” Hayes continues. “For example, a farm would lend itself to an asset-based valuation as most of the value would lie in the land, buildings and machinery. On the other hand, a medical practice or advertising agency might have very few tangible assets so they’re more likely to be assessed on their ability to generate an income.”
The industry method can be used to simplify the calculation for businesses such as pharmacies, accounting practices or coffee shops – those in industries with a large number of participants, a consistent business model, a reasonable level of buying and selling activity and some level of publicly-available information around that.
“Valuers can use this information to create different parameters,” says Hayes. “For example, small accounting firms are currently valued at between 75 cents and one dollar for every dollar of annualised revenue. They can then take this range as a starting point.”
Whether or not the industry method has been applied, the final valuation will always take the risk profile of the business into account – the lower the risk the more the business is worth. Hayes has identified five major areas that a professional valuer will investigate.
“Professional valuers take all of the appropriate factors into account in assessing what your business is worth,” says Hayes. “Importantly, they also provide information that can help you to plan for the future.”
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