1. What are you valuing?
- Is it shares in a company?
- Is it the going-concern “assets” (tangible assets i.e. plant, intangibles & stock – this is the way that most businesses are sold)
- Is it a full interest or part interest?
2. What is the purpose of the valuation?
- Buy / Sell decisions?
- Partnership / Marital splits?
- Litigation Support?
3. What standard of value will apply?
- Fair Market value or Fair value?
- A particular standard may be mandated.
- Is it a formal valuation (AES No.2), or an indicative opinion?
4. What is the effective date of the valuation?
- The “as at” date may be different to the present date.
- Under AES No.2, the appraiser can only use information that was known, knowable or reasonably foreseeable at the effective date.
5. What is the key information concerning the business?
- History, accounts, operational details, staffing, location, property tenure including rent reviews, customers, suppliers, processes, etc
- What value modifiers apply to this business?
6. What is happening in the industry?
- Market growth / decline?
- Economic factors?
- What risks does the business face – key staff, technology or legislative changes?
7. What are the key intangibles of the business?
- Identify intangibles (rights & contracts, intellectual property & databases, relationships, going concern goodwill, etc.)
- How transferable are the intangibles? (Issues of personal goodwill)
8. How ‘honest’ are the financial accounts?
- Identify “one-off” sales or expenses
- Are some expenses discretionary? – i.e. personal, or not necessary for the production of income?
- Normalise the accounts.
- Historic figures are no guarantee of future performance.
- An enquiring mind & a keen sense of curiosity may reveal more than an addiction to spreadsheets.
- Can financial forecasts be supported?
9. Which are the appropriate valuation methods to use?
- Asset-based, market-based & earnings-based approaches should be considered
- Two or three methods should be applied to check your answer
- Sanity check – what would you personally pay for this business?
10. What does the market say?
- All valuations are only opinions – the only true test of value is an arms-length sale on the open market.
- Is the business saleable?
- Transaction data from actual sales of similar businesses provide a valuable guide
Bizstats supplies valuable information on thousands of SMEs that have been sold in New Zealand. Data on market transactions can support defensible valuations.