Why Would you Need a Business Valuation Report? | Hilton Smythe

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Why Would You Need a Business Valuation Report?

Commissioning a valuation report provides professional insights into the valuation models used, where the value comes from, and how your firm compares to others.

Business valuations estimate how much your business is worth, with a valuation report laying down how an independent valuer arrived at their conclusion. Commissioning a valuation report provides professional insights into the valuation models used, where the value comes from, and how your firm compares to others.

These reports feature in various scenarios, including legal proceedings and mergers and acquisitions. With up to 90% of your wealth tied up in the value of your business, it’s easy to see why arriving at an accurate pound figure is critical.

In this guide, we’ll investigate the reasons why valuation reports are so pivotal in the UK business community.

Business valuation reports are professional reports produced by expert valuers to uncover the economic value of a company.

Formal business valuations always come with a report detailing every aspect of the valuation process, the business being valued, and the methodologies used by the person doing the valuation.

Some of the aspects that may appear in your report include:

·  Assets

·  Liabilities

·  Model used

·  Macroeconomic factors

·  Microeconomic factors

·  Adjustments

·  Industry comparisons

Depending on the company, these reports could grow to hundreds of pages. Moreover, every business valuation expert may have their own preferred format, meaning no two reports will look the same. However, every report contains the same information because business valuation is an established science.

Selling your business and executing your exit strategy means maximising its value. With that in mind, there’s no legal requirement to present a formal valuation report before selling. However, serious buyers want to know the true worth of a business to arrive at a fair price.

It’s practically unheard of for significant mergers and acquisition deals to proceed without one of these reports. Remember, most business owners don’t know the value of their companies. According to one study, a third of UK business owners don’t know how much their firms are worth.

In short, it might not be a legal requirement, but valuation reports are often where negotiations begin. Remember, valuation reports hold tremendous value because they’re produced by someone not connected to the business being valued.

Commissioning a business valuation report doesn’t mean you’re selling your business. Many companies keep a running tally of what their business is worth to provide a snapshot of their company’s journey to success.

Managing directors might ask for a formal business valuation report for any number of reasons. Here are some of the scenarios where valuation experts are called in to provide their services.

Track company growth

Measuring how much you’re growing means keeping an eye on the balance sheet and ensuring your assets remain ahead of your liabilities. However, it’s not just about ensuring your brand is on the right trajectory. It’s about showing the strengths and weaknesses at a particular time.

Some managing directors choose to conduct internal valuations using their own staff. The issue with this strategy is they often lack the expertise and experience needed to carry out an in-depth valuation. Likewise, they’re biassed entities, so it’s tricky to get an objective valuation.

Professional valuation companies offer additional value by providing the following:

·  Comparable data

·  Market knowledge

·  How much similar businesses sell for

Valuation agents dig even further using granular data to continually refine their valuations. Remember, these professionals often have industry knowledge themselves, putting them in the ideal position to track your company’s value and determine its current position in your industry.

Competitor benchmarking

Why is it necessary to know the value of your company beyond just hoping for an ego boost?

The most valuable companies in the UK didn’t gain their status because they crossed a particular number but because of how they compare with similar businesses on the national and global stages.

Knowing how you compare to your competitors demonstrates where you figure in the grand scheme of things, your strengths, and where you fall short. Some of the industry benchmarks a professional valuation agent might use include:

·  Business performance

·  Market position

·  Financial health

You’ll learn about your growth potential and areas of improvement. Countless untapped opportunities have been brought to a company’s attention just by using industry comparisons.

Assist key decisions

Unfiltered views of your business can provide insights when you don’t know where to turn. Remember, it’s not purely an issue of using valuation reports to discover where you’re weak but also how to maximise your strengths.

You may use these reports to support decisions on sales forecasting, budgeting for the financial year ahead, and how to access more finance to support growth and investment.

Plan a merger or acquisition

The most common exit strategy UK managing directors have is to sell their businesses. Executing this long-term plan begins with a business valuation because how can you price a company with no reference point?

Even the most experienced UK entrepreneurs often lack the knowledge to price their own businesses. Valuation reports tell you how much your business is worth at any given time, which ensures you get the best price.

On the other hand, getting a report long before you publicly put your business up for sale enables you to uncover opportunities for amplifying its value. This ultimately guarantees you being able to harvest the fruits of your labours.

Don’t forget that negotiations are often complicated and contentious, with buyers wanting more and sellers desiring to pay less. Formal valuation reports are the premise for offers and indicate what’s fair.

On a side note, other exit strategies beyond straight sales also benefit from business valuation reports, including management and partnership buy-outs.

Secure more financing

Financing is the fertiliser that lets businesses grow. Without investment, scaling at the optimal rate is nearly impossible. Valuation reports can serve as a defining document for lending and investment applications.

Investors themselves might want their own reports, but presenting an independent report goes a long way to show them that they’ve got a proposition that could increase the value of their investments in the years to come.

For example, let’s say that Company A has a valuation report showing they’ve got a positive cash flow, a strong balance sheet, and a consistent, reliable turnover. Investors are probably going to be interested in a company like this because having all three of these factors in place makes a low-risk opportunity.

On the other hand, Company A may announce that it’s about to beat its financial targets for the year. Valuation reports provide validation to support claims like this, allowing you to secure a timely investment that capitalises on this opportunity.

Expert witness valuation reports

Disputes happen all the time, and business valuation expert witnesses may need to produce reports. These reports rely on providing valuations based on recognised techniques in UK law. They’re documents suitable for settings like mediation sessions and UK courtrooms.

Essentially, they’re still the same thing. They’re there to provide an opinion on the economic value of a company. Some of the scenarios expert witness valuation reports might be used include:

·  Commercial disputes

·  Shareholder disputes

·  Sales disputes

·  Divorce proceedings

·  Tax issues

With this in mind, it’s clear that business valuation reports play an essential role in everything from future decision-making to contract disputes. 

At Hilton Smythe, we support UK businesses in preparing valuation reports they can put their trust in. Using our decades of experience, we’re there to commission the report you need, so get in touch with our team today to learn more.

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