Valuing your company accurately is crucial if you’re looking to sell your business. Likewise, knowing the value of the company you want to purchase is vital to avoid overpaying. But how do you know what the true value of a business is?
According to a study, 33% of UK business owners didn’t know how much their business was worth. Knowing how much you’re valued at defines the baseline for mergers and acquisitions and your personal exit strategy.
In this guide, we’ll discuss business valuation reports and what’s included within them.
How are businesses typically valued?
The idea that the value of something is defined by what someone is willing to pay for it is true. However, since businesses vary so wildly in value, most people have no idea what they are willing to pay, and this is where independent business valuations come in.
Different types of valuations might be used, including:
· Standard business valuation
· Property valuation
· Probate valuation
Depending on the type of valuation method and report you choose, the findings could differ significantly. That’s why working with a professional is crucial to figuring out which report type works best for you.
What is a business valuation report?
Business valuation reports focus on the assets and liabilities a business holds. They can be tangible or intangible assets, and the report will include some basic instructions and the current rateable value.
At the beginning of the report, the valuer will outline which methodology they used and the valuation terms before transitioning into the different assets and liabilities before arriving at an estimated market value.
Why would a business need a valuation report?
The answer might seem obvious, but there’s a range of reasons why a business may want to commission a valuation report. Here’s a rundown of why some businesses choose to have these reports conducted:
- Upcoming Sale – The valuation report outlines the value of a business and ensures that both the buyer and seller are getting a fair deal. This also removes the emotion and provides an objective view of business value.
- Performance Tracking – Some businesses may want to track how they’re performing over the years. This is why they may commission a report every so often to see whether they’re moving in the right direction.
- Compliance – In the UK, all mergers are subject to CMA investigation if a business being acquired has a turnover of more than £70 million or the combined business claims a 25% share of the market. A valuation report can, therefore, provide an early warning if an investigation is incoming.
Business valuation reports can also serve as the benchmark for exit planning and unlocking new private investment. With a report in hand, you know that your business is being treated according to its true worth.
What is included in a business valuation report?
Every valuation report will differ based on the firm or individual preparing them. The information and general setup will usually be the same, but how a report is formatted or styled will vary from professional to professional.
So, what does a report look like from cover to cover?
· Cover, including name, valuation date and type of report.
· Valuation summary consisting of the standards and methods used.
· Table of contents.
· Executive summary providing an overview.
· Economic outlook focusing on the wider economy and its impact on the company.
· Industry outlook focusing on the company’s industry and how that’s influenced the company’s value.
· Business overview.
· Cost of capital.
· Discounts and premiums.
· Conclusion of value.
· Appendixes, which may include financial statements, industry comparisons and other supporting material.
In short, a valuation report will include everything to be valued within a business in minute detail. These independent reports can be used to solve disputes and are legally recognised, which is why they can be used by expert witnesses.
Of course, business valuation reports may also differ based on the type of report that has been commissioned. However, the general setup defined above will always apply regardless.
Important things to look for in a business valuation report
It’s not uncommon for valuation reports to reach 100 pages or even more. Knowing where to start lets you extract the key information you need without rifling through every page.
Typically, we prefer to focus on five aspects of the average report, including:
1. Appraisal Summary – Your appraisal summary is effectively the final value of your business and can usually be found towards the back of your report. This will tell you immediately what your company’s value is and the method used to arrive at that figure.
2. Summary of Approaches – Valuers may use various methods to determine value. The problem is each one can lead to arriving at a radically different value. The summary of approaches shows what the valuer used to arrive at their conclusion.
3. Normalising Entries – Look for any normalising adjustments, as these impact the value of your business. For example, one-time expenses relating to an unusual event, like selling a division. Ask yourself whether you agree with these adjustments.
4. Discount Rate Summary – If you were using methods like discounted cash flow, you’d want to look at the discount rate summary. Most rates are indexed, but any company-specific risk is down to the judgement of the valuer. The summary will tell you the valuer’s thinking.
5. Business Valuation Summary – Your valuation summary is an indication of what assets and liabilities impacted your business’s final value.
Your business valuation report provides tremendous insights into your company if you know what to look for. However, we understand that these reports can get confusing.
With our business experts at Hilton Smythe, we support you in cutting through the noise. To learn more about how we support the UK’s business community in matters of valuations, contact the team today.
