spacer
spacer
spacer
spacer



CPA LOGO
spacer
Latest News
Hot Issues
ATO reveals small business hit list to combat tax debt
What are the FBT implications of Employee Christmas Parties and Gifts?
Assess a business before you buy it
Christmas Parties and Taxi Fare/Rideshare – FBT implications.
Practitioners cautioned on ATO’s top target areas for GST
ATO to target growing businesses in latest compliance blitz
Our SG compliance results are here
Top 20 Most Watched Christmas Movies ever - pre covid
A Unique Advent Calendar
Businesses ghosting the ATO targeted in debt collection blitz
Claiming the tax-free threshold: getting it right
Aussies tired of ‘dodgy tax criminals’, warns ATO
Protect your small business by following these essential steps.
Super guarantee a focus area for ATO business debt collection
Controversial ‘Airbnb tax’ set to become law
Withholding for foreign residents: an ATO focus area
1 in 3 crypto owners confused about tax, study reveals
20 Years of Silicon Valley Trends: 2004 - 2024 Insights
ATO reveals common rental property errors from data-matching program
New SMSF expense rules: what you need to know
Government releases details on luxury car tax changes
Treasurer unveils design details for payday super
6 steps to create a mentally healthy and vibrant workplace
What are the government’s intentions with negative gearing?
Small business decries ‘unfair’ payday super changes
The Leaders Who Refused to Step Down 1939 - 2024
Time for a superannuation check-up?
Scam alert: fake ASIC branding on social media
Millions of landlords the target of expanded ATO crackdown
Government urged to exempt small firms from TPB reforms
ATO warns businesses on looming TPAR deadline
How to read a Balance Sheet
Articles archive
Quarter 3 July - September 2024
Quarter 2 April - June 2024
Quarter 1 January - March 2024
Quarter 4 October - December 2023
Quarter 3 July - September 2023
Quarter 2 April - June 2023
Quarter 1 January - March 2023
Quarter 4 October - December 2022
Quarter 3 July - September 2022
Quarter 2 April - June 2022
Quarter 1 January - March 2022
Quarter 4 October - December 2021
Quarter 3 July - September 2021
Quarter 2 April - June 2021
Quarter 1 January - March 2021
Quarter 4 October - December 2020
Quarter 3 July - September 2020
Quarter 2 April - June 2020
Quarter 1 January - March 2020
Quarter 4 October - December 2019
Quarter 3 July - September 2019
Quarter 2 April - June 2019
Quarter 1 January - March 2019
Quarter 4 October - December 2018
Quarter 3 July - September 2018
Quarter 2 April - June 2018
Quarter 1 January - March 2018
Quarter 4 October - December 2017
Quarter 3 July - September 2017
Quarter 2 April - June 2017
Quarter 1 January - March 2017
Quarter 4 October - December 2016
Quarter 3 July - September 2016
Quarter 2 April - June 2016
Quarter 1 January - March 2016
Quarter 4 October - December 2015
Quarter 3 July - September 2015
Quarter 2 April - June 2015
Quarter 1 January - March 2015
Quarter 4 October - December 2014
Quarter 4 of 2021
Articles
Our 2021 Advent Calendar.
ATO flags focus areas for combating $33.5bn ‘tax gap’
Business Resources - Grants, Assistance, Resources and more.
Employee Christmas Parties and Gifts – Any FBT?
FBT – Christmas Parties and Taxi Fares
How the best firms are supporting the mental health of their employees
Asian Economies (1960 - 2020)
Making the festive season less taxing
Why more Millennials are turning to SMSFs
Hardship priority processing of tax refunds
Business valuations: Tips, tricks and traps
Government moves to scrap SG $450 threshold
World's most productive countries
Superannuation changes - Superannuation guarantee (SG)
Unused Super Contributions
Main residence exemption myths and misconceptions
ATO extends COVID-19 relief for SMSFs
Treasury consults on increase to charities financial reporting threshold
Greenhouse gas emission by country since 1880
ATO announces STP Phase 2 blanket deferral
Reminder: super changes for the 2021 financial year
Recontributions of COVID-19 early released super
Working from home during a COVID-19 lockdown: Can you claim a tax deduction for rent?
Business valuations: Tips, tricks and traps

Business valuation is often described as a dark art. Indeed, get three different valuers to value the same asset and you will likely end up with three very different results. But this doesn’t need to be the case.

 



Done properly, business valuation uses detailed financial and risk analysis to determine the appropriate valuation for a business. At its core, it’s about determining two key things, the same things needed to value any type of asset: return and risk.


Return in a business is the profit you make – what return can I expect from my investment? The part that most people refer to as art is estimating the risk of that return continuing. But I put it to you that using detailed risk analysis tools that consider macro-economic factors, industry drivers and business risk can provide an accurate risk score with an appropriate multiple – every time.


So what should go into a data-based risk analysis? The following terms are key:


• Multiple – What factor (based on risk) do I multiply the annual profit by to get the goodwill value?


• Goodwill value – The ongoing value of the returns produced by the business (not the underlying assets).


• Intangible value – Many businesses create substantial value on intangible assets like their brand, some unique intellectual property or a secret process.


• Equity valuation – This is the goodwill value of the business plus any cash less any debt. In other words goodwill plus net tangible assets.


• Value drivers – In all businesses there are significant levers you can pull to improve value. Some work better than others and getting the order right makes a big difference.


One of the most difficult items to value for any business is intangible assets. An intangible asset is something that is not physical. Stock, plant and equipment are all tangible. 


Assets such as goodwill, brand recognition, intellectual property, patents and trademarks are all examples of intangible assets. For most small to medium-sized businesses, these can be difficult to develop, taking many years to build up.


A prime example of this is intellectual property, which is often misunderstood and undervalued by mid-market business owners. Intellectual property is simply defined as “intangible creations of the human intellect” and is usually made up of proprietary knowledge, a productive new idea, methodology, process, secret recipe, invention or design. 


It is quite common in the IT space to see businesses being purchased off the back of the intellectual property they own. Businesses that can achieve this successfully generally sell for maximum possible value.


But it’s not always technology. Many businesses have realised substantial value as a result of the commercialisation of their intellectual property or use of a particular process or methodology that has proven to be successful.


What makes any intellectual property valuable is the application with customers, the size of the potential target market and its uniqueness. Any business that can develop and document ownership of unique IP that is accessible and wanted by a significant target market should be hugely valuable.


Of course, just because something can be analysed methodically, doesn’t mean it’s easy to do. Which brings me to my tips, tricks and traps for valuing businesses:


1. Add-backs – Make sure you normalise the profit of the business. Remove any personal expenses, over or underpaid salaries to owners, excess super contributions, rent paid to a related entity etc.


2. Comparative sales – Unlike the property market this is very difficult to determine. No two businesses are alike, and the data is simply not easily available.


3. Valuation purpose – Are you valuing the business for sale, for a restructure, to sell equity to employees or for a legal case? All have different issues and risks and so the valuation can be different in each case.


4. Non-financial analysis – This is vital. Many focus simply on the financials (return) and while they are important, they only make up half of the picture. The other aspect is risk, and this can only come from non-financial analysis.


5. Stability of earnings (profit) – This is a big factor. Instability just adds to the risk. So-called boring businesses who just grow sales and profit year-on-year are more valuable.


6. Not all income is created equal – Recurring revenue (think SaaS subscriptions) is far more valuable than constantly having to make another sale.


But the number one piece of advice I give business owners? Begin with the end in mind. In my area of business – succession and exit planning – that means an extended timeline for planning and strategy. Having a goal that is five or 10 years out, not 90 days.


It takes time to build and increase value. The difference between equity (or long-term value that can be extracted when you exit) versus income is time frame.


Therefore, you need to start early by contacting your Accountant to seek their advice on issues such as what your business is worth, mapping out what needs to be done to drive value higher, and how to make the business more attractive to potential purchasers.


 


Craig West is the chief executive and founder of Succession Plus.


 


Craig West
26 October 2021
www.accountantsdaily.com.au




21st-November-2021
spacer
Privacy Policy | Disclaimer