What is a Business Valuation?

A Business valuation refers to the process undertaken to determine the economic value of a business. These valuations are obtained for a variety of reasons such as sale or taxation purposes, and are often required for family law property settlements. In some cases, a business value can be a sizeable part of the overall asset pool.

In valuing a business there are normally three criteria that affect the value of the business .

  1. Firstly, looking at the circumstances and the reasons for the sale. This means that if you are forced to sell quickly you may not receive as much as you would if you had been in a position to undergo lengthy negotiations. Often in family law matters the business is being retained by one of the parties rather than being sold and therefore this criteria is not relevant in determining the value of the business.

  2. Secondly, the value of both the tangible and intangible assets of the business must be considered. In some instances the value of a business brand or customer goodwill may be more valuable than the machinery or equipment. In other circumstances, the brand and goodwill have no value at all and the value of the business is only the value of the tangible assets such as equipment and stock.

  3. Thirdly, the years of business operation. Ordinarily the longer a business has been operating the better the track record, cash flow and loyal customers who provide repeat business. A purchaser should be wary of businesses for sale that have only been trading between one and two years, such as bars or cafes. Such businesses may be experiencing current popularity but the market may be about to turn away.

Impact of COVID-19 on business valuations

A business valuation is only able to take into account the financial information available at the time of the valuation – which would be either as at 30 June 2019 or 31 December 2019. Valuers are unable to include a ‘loading’ that takes into account the influence COVID-19 has had on the market as a subsequent event.

Whether your business will be adversely, positively or unaffected by the pandemic is impossible to predict at this time, as the full impact that COVID-19 will have on the economic and commercial market cannot yet be determined. Whilst it is reasonable to predict that the pandemic will have an economic impact on the value of your business, when valuing your business during COVID-19, it will take some time before valuations reflect the impact of the coronavirus in a just and equitable way.