benchmarkvaluation

“Online” Valuation Tools – the benefits and the dangers

Wed, 01 Jul 2020 06:24:53 GMT

What is an "Online" Valuation Tool?

It is possible to sit down at your computer and find an “online” facility that will produce a “business valuation”. Such an option seems like an attractive way to determine the value for a business. It’s quick, it’s cheap, and it’s confidential.

When a business owner wants to have a quick idea of what the business might be worth, such a tool may provide a good guide, but it also may be completely misleading….. and that is the real problem with such a tool. It is only a guide at best. At worst it will be wrong, and may lead to a business owner feeling that their business is worth a lot more (or a lot less) than it is really worth.

Usually these online tools rely upon the user inputting a figure for profit, then answering a few questions on the business (to assess risk), and then when the button is pushed. Voila!!! The business value is produced. It is that easy.

Just like anything else in life – you get what you pay for, and if it looks simple – it’s probably wrong.

As an example. When you enter a profit figure, there can be a great disparity between the “real” profit, and the “theoretical” profit. Which number you enter will have a large impact on the result. This is one of many variables that can contribute to the production of an inaccurate result. There are many other inputs which can produce an erroneous report.

The people that have used these ‘tools’ will tell you that they have Disclaimers written all over them. Here is one example “Disclaimer: This tool should only be used as a general indicator of value. There are other factors associated with the sale of a business that can impact the value of a business that only an experienced broker will be able to identify. Please contact us for a more personal evaluation of your business and for suggestions on how to prepare your business for the highest sale possible.”

They are all similar. How about this one? “This business valuation calculator is designed as a research tool only to provide small business owners with a free and confidential instant business valuation result that can be used to help determine an approximate asking or sales price when valuing a small business for sale. This business valuation calculator is designed as a self-help research tool for independent uses only. All calculation results are hypothetical and for example purposes only. Note: This calculator is not intended to provide investment advice, or provide a firm business valuation, or replace an independent business appraisal provided by a qualified and professional valuation expert, Business Appraiser or Business Broker . Disclaimer You can also request a free and confidential preliminary business valuation consultation here from a professional.”

The worrying thing is that most of these ‘tools’ are really only being used to pick up clients. They are really just a marketing tool used to lure business owners into talking to their company. There is a hidden agenda. You can see it in the wording of these example disclaimers where they ask for you to contact the company.

Nearly all of these tools ask for an email address and contact details so that they can follow up in a few days to try and get the user to talk about having a proper valuation report completed. Which really is the only way to properly value a business.

How do you know that a business valuer is qualified?

Wed, 01 Jul 2020 06:24:03 GMT

How to determine a qualified business valuer?

It is surprising to many people to know that business valuations are not regulated in Australia. There are a handful of qualifications, but no formal regulation of business valuation exists…… yet. **

At present there is no universally accepted course or qualification for business valuers in Australia. There are some qualifications such as:

The Australian Institute Of Business Brokers Registered Business Valuer qualification
The Australian Property Institute Business Valuation Certificate
The Chartered Accountants Business Valuer qualification

When looking for a business valuer you need to compare each valuer on their merits. Their experience, their track record, and their market knowledge. Ultimately it’s the valuer’s skill, expertise and integrity that count. Anyone can make a good first impression. It takes a little time and research to make sure that you engage a valuer knows what they are doing

The type of aspects that you need to look at when selecting a valuer include:

How long have they been a valuer for?
Have they acted as an expert witness, or given evidence in court?
Does the valuer have any tertiary qualifications?
What methodology would the valuer apply?
Will the valuer inspect the business? (very important – we say, if you haven’t seen it, you can’t value it)
Will the valuer’s report clearly outline all assumptions, calculations and processes? Or will they only provide a summary?
How many valuations has the valuer completed?
… And most importantly, what market evidence will the valuer rely upon to produce their report?
Ensure that the valuer you engage has the skills and experience that you want and the knowledge of your particular industry to competently evaluate the business value. Also be sure that the valuer will be able to reference real sales data, and that they are not just “picking a number” out of thin air. Only current sales evidence can provide a professional valuer towards a proper assessment of the current market value of a business

Make sure that your valuer will use current market data and evidence to produce your report.

There is a big difference between a market appraisal and a formal business valuation. Without detailed financial analysis, and appropriate reference to market sales evidence, the valuation report won’t be worth the paper it’s written on. Price does not guarantee quality either.

“Overvaluation” is a common problem when selling a business

Wed, 01 Jul 2020 06:21:07 GMT

Why is "Overvaluation" a common problem?

Many people think “This business owes me $500,000, so it must be worth at least that much, or ” “’I’ve been working on this business for 10 years – so it must be worth a lot of money” – but in reality the business value is really about the cash flow of the business. This news comes as a disappointment to many business owners as they have often put their heart and soul into the business, and often think it’s worth a lot of money.

For most business owners it’s difficult to be impartial about something they’ve created, something which you’ve spent years of hard work building, and something which (to an extent) defines who you are. After all a business is many people’s superannuation fund, and they are relying on the sale of the business to fund their retirement.

Most business owners tend to overvalue their businesses, and unfortunately, some business brokers also overvalue businesses because that’s what the vendor wants to hear, and by doing so they improve their prospects of securing the listing of the business.

The sad truth is that of the many thousands of businesses currently on the market, the majority are set at an extremely optimistic asking price

Derek Burgoyne, Cornerstone Business Agents

Ultimately, a business is only worth the amount that a buyer is willing to pay it.

Misleading

Sometimes, a vendor can get lucky and recoup a selling price which is above the value that accepted methods of business valuation may arrive at. It could be that a buyer has a particular reason for wanting that particular type of business – or location, so to that particular buyer its worth more than it would be to most other buyers. That would be an overpayment in terms of market value, but not an overpayment from the vendor’s point of view.

However, this could mislead other vendors into thinking that price is the benchmark for businesses with comparable profits, similar reputation and similar potential, when in actual fact it is an anomaly.

Some people might look at how much a buyer paid for ‘X’ business to determine the price of another business, not realising the reasoning behind the price paid. This can be a “misleading” way of achieving a business valuation.

Experienced business valuers can provide “example after example” of vendors with an inflated sense of their business’s worth. Here are some of the reasons behind overoptimistic overvaluations of the business owner:

This is the price the business owner needs to achieve – to cover loans, pay the agents, banks and other creditors. Many owners feel that if they can’t get a certain price for their business then there is no point in selling it, as they can’t pay off their debts, in which case they’d rather go bankrupt. Some business owners simply want to get their original investment back.

A trusted adviser with little experience in business valuation or sales has suggested the price. The less experience and confidence an adviser has in his or her ability to value a business the more likely he or she is to overvalue to please the client.

A Business Broker suggests the business value to the business owner as a way of gaining the instruction as a sole selling agent. This enables them to get a large up-front fee and then coming back with lower price offerings to “condition” the seller to accept a lower price.

There is a lack of financial information supplied. The business ca only then be valued on indications of turnover and profitability. As most owners usually overestimate their turnover and profitability, the business is usually overvalued – in any case this is a suspect method of valuation.

The vendor gets greedy. A number of times vendors have told me that they knew their business wasn’t worth the figure they’d asked, but they thought they’d give it a try anyway. Blind optimism!

"Unfortunately many well-meaning advisers talk their clients into believing that the business is worth more than it really is. Often because they don’t want to offend, or they don’t really know what the market is doing. …. And often because they are too embarrassed to admit that they are really not sure of the value – so they err on the high side"

Bruce Coudrey, Benchmark Business Sales

Overoptimism

The analogy of selling a house can explain how a buyer’s judgment can be clouded by the vendor’s misplaced optimism: When the vendor has a particularly good business and believes its worth above and beyond its true value, they can hold that view so strongly that the buyers believe the hype. It’s like houses, when people put crazy prices on them and people pay it because they’re scared of getting left behind.

Experienced business broker have been quoted as saying: “I’ve never come across a business owner who has undervalued their business; it’s always overvalued, often quite considerably.”

Ensuring an accurate valuation

So – as a business owner, how do you overcome your natural bias towards over-valuing your business? How do you arrive at a valuation which reflects the market value, both present and potential? How do you decide on a price which you have a realistic chance of realising if you are wanting to sell at some time?

Remember that the business value is really about the cash flow of the business – and the DEMAND for that business. Demand for the location, demand for the industry type.

It is always wise to invite two or three experts to discuss the value the business and to ask each expert for an explanation of how they would calculate the business value. Their explanation should include examples of similar businesses recently sold – or on the market at least – and what adjustments and multipliers have been applied to the net profit to value the goodwill of the business. You should also ask them to comment on current demand for the type of business.

It is also wise to seek advice on how the business value could be increased. What improvements would have to be made to the property?, should the lease be extended?, what financial information should be provided?, etc.

It’s clear that there are certain things that business owners must do to ensure they do certain things to minimise the risk of overvaluation:

Appoint the right valuer – ideally someone with experience valuing businesses in your sector
Listen to the valuer – he’s objective in a way you simply can’t be, and he’s experienced in valuing and selling businesses
Provide the valuer with all financial information requested; be as thorough as possible
Remember that the true worth of a business is about the income it will generate for the owner, and the potential for growing that income. It has nothing to do with the number of hours you have invested in building the business, or the money that you owe to the bank, or what you have invested – sentiment doesn’t come into it. We all need to be realistic about the value of our business – optimism can only lead to disappointment.

Valuing a Business or a Company – What is the difference?

Wed, 01 Jul 2020 06:21:06 GMT

What are the differences between valuing a Business and a Company?

People often confuse the valuation of a business and the valuation of a company. So what is the difference?

The valuation of a business is really an assessment of what the business would sell for on the open market – at any given point in time.

The valuation of a company is totally different. The valuation of a company includes the assets and liabilities, and may approach the assessment of the ‘goodwill’ owned by the company in a different way to the way goodwill is assessed when selling a business.

For example; a transport business showing (adjusted) average earnings (profit) of $350,000 a year and with assets of $1,000,000 my sell for $1,250,000 – so that is the business value. But the company may have assets of $1,000,000 and liabilities of $900,000 – so the company may only be worth $100,000. The difference between to two valuations is quite large.

Even experienced professionals such as lawyers and bank managers can confuse the two approaches. Often when engaged to provide a valuation for the Family Court, or a partnership dissolution there can be a significant misunderstanding between all parties as to how the valuation should be approached.