BG801 Valuation considerations
Taxco Business Guide
Buying or Selling a Business
The objective of this business guide is to summarise important considerations regarding valuations, when and why they are required and the various techniques that Taxco uses to value your business.
In a world where business relationships are constantly changing, the need to have a business valued or appraised arises often. There are many reasons why one may require a business valuation and we offer various solutions in this regard:
Our valuation professionals are committed to the valuation of private companies, trusts, close corporations and partnerships. They have the experience, knowledge and creativity to provide our clients with innovative, accurate and timely valuation solutions. This enables us to meet our client’s valuation needs in the best and most cost-effective manner possible for:
- Business Planning
- Buy-sell Agreements
- Employee Share Ownership Plans
- Strategic and Succession Planning
Whether your valuations solutions needs are based on preparing a prospectus or an offering document from the seller’s perspective, a merger or acquisition and related due diligence from the buyer’s perspective, or important estate or family-owned business planning, our professionals achieve independent and thorough valuations for:
- Joint-venture Formation
- Mergers and Acquisitions
- Sale of Business or Partial Interests
When a business valuation is required in connection with a taxable estate, we use our valuation skills and our estate planning skills to plan for issues that may be raised by the South African Revenue Service in advance of filing the estate tax return.
By keeping current on the Tax Court and Appellate Court rulings related to valuations, we are able to address many issues in advance and increase the likelihood that SARS will not successfully challenge the valuation.
- Donations Tax
- Estate Planning
- Statutory Requirements
We know from experience the records to request, questions to ask, and documents and trends to analyze. Our experience in litigation provides a great resource for preparing in advance for an adversarial action regarding the business valuation. Our conclusion is a value that we can present, explain and support under even the most rigorous scrutiny in court, with tax authorities, or in acquisitions and other corporate negotiations.
- Breach of Contract
- Business Interruption
- Compensatory Damage Cases
- Damage Assessment
- Loss of Profits
- Partnership Admissions/Dissolutions
- Shareholder Disputes
When a client’s business or personal needs require a business valuation, we will apply our experience, knowledge and technical skills. Our valuation expertise is complemented and enhanced by our staff of registered "professional accountants, providing quality, real-world accounting and business advice to real companies with real problems. This helps us to provide first class professional service not only in valuation, but also in all your related accounting, business and tax consulting needs.
- Collateral Valuation
- Liquidation and Re-organisations
Valuing a business requires considerable judgment and expertise. An independent valuation expert brings the benefits of professional training, experience and third-party objectivity to the process. Our help in valuing damages, for example, is based upon realistic assumptions that properly reflect the current economic environment. We make sure the evidence supports the assumptions and findings.
You send us the facts and we will determine the value. To obtain a pre-quote for a valuation submit the online query below:
How can Taxco help?
Valuation is a complex and sometimes controversial subject. It requires in-depth understanding of the market, the asset and its competitors, together with financial and non-financial information, as well as factors such as the legal and regulatory environment.
Allow Taxco's effective valuation advice combined with the right blend of analysis, experience and professional judgment be your valuation solution.
Some of the valuation techniques that we use are:
While there is a ready made market and market price for the owners of listed public company shares, those needing a valuation for a private company need to be more creative.
Various valuation methods have developed over the years. These can be used as a starting point and basis for negotiation when it comes to selling a business.
• Discounted Cash Flow - Generally appropriate for cash-generating, mature, stable businesses and those with good long-term prospects, this more technical method depends heavily on the assumptions made about long-term business conditions.
Essentially, the valuation is based on a cash flow forecast for a number of years forward plus a residual business value. The current value is then calculated using a discount rate, so that the value of the business can be established in today’s terms.
• Price Earnings Ratio - Often, a price earnings ratio (P/E ratio) is used, which represents the value of a business divided by its profits after tax. To obtain a valuation, this ratio is then multiplied by current profits. Here the calculation of the profit figure itself does depend on circumstances and will be adjusted for relevant factors.
A difficulty with this method for private companies is in establishing an appropriate P/E ratio to use - these vary widely. P/E ratios for quoted companies can be found in the financial press and one for a business in the same sector can be used as a general starting point. However, this needs to be discounted heavily as shares in quoted companies are much easier to buy and sell, making them more attractive to investors.
As a rule of thumb, typically the P/E ratio of a small unquoted company is 50% lower than a comparable quoted company. Generally, small unquoted businesses are valued at somewhere between five and ten times their annual post tax profit. Of course, particular market conditions can affect this, with boom industries seeing their P/E ratios increase.
• EBITDA - A similar method uses EBITDA (earnings before interest, tax, depreciation and amortisation), a term which essentially defines the cash profits of a business. Again an appropriate multiple is applied.
• Market Value – Asset Based. This type of valuation method is most suited to businesses with a significant amount of tangible assets, for example, a stable, asset rich property or manufacturing business. The method does not however take account of future earnings and is based on the sum of assets less liabilities. The starting point for the valuation is the assets per the accounts, which will then be adjusted to reflect current market rates.
• Entry cost - This method of valuation reflects the costs involved in setting up a business from scratch. Here the costs of purchasing assets, recruiting and training staff, developing products, building up a customer base, etc are the starting point for the valuation. A prospective buyer may look to reduce this for any cost savings they believe they could make.
• Industry rules of thumb - Where buying and selling a business is common, certain industry-wide rules of thumb may develop. For example, the number of outlets for an estate agency business or recurring fees for an accountancy practice.
With any of the valuation methods discussed above, it is important to remember that valuing a business is not a precise science. In the end, any price established by the methods described above will be a matter for negotiation and more than one of the methods above will be used in the process.
Ultimately, when the time for sale comes, a business is worth what someone is prepared to pay for it at that point in time.
How can Taxco help?
We would be pleased to discuss how one of our valuation solutions can benefit you as well as help you develop an exit strategy to maximise the value of your business.
For more details, Contact Usnow.
This Guide is subject to the Terms and Conditions of Use of Taxco Services and their Website.