Business Valuations

Definition: A business valuation is an analysis and review of a business as a whole, and is conducted to determine its overall standing and performance, for example, before being sold to a potential buyer.

Why is a business valuation important?

The value of a business will have an important impact on the strategy, direction and decision-making taken by all key role players or potential role players in that business. It can assist those wishing to buy or sell a business, as well as shareholders, potential investors and others with a vested interest in the business to understand what the business is worth and actions they may need to take to build the business further. Business valuations are also often conducted in divorce proceedings, for retirement purposes, for key man insurance or business assurance applications, and in mergers and acquisitions. So, it’s important to get it right.

At Grid Forensic Accounting, our chartered accountants are specialist business valuators who can provide the in-depth analysis required to give you peace of mind. Through our business valuations process, you will receive a good understanding of the health of the company, become aware of any red flags or suspected fraud and be provided with a fair report. In addition, a valuation performed by a forensic accountant is also suitable for use in a court of law. (To read more about the role of a forensic accountant, click here.)

Whatever your situation, we can provide you with a reliable business valuation to suit your needs.

What methods do we use in a business valuation?

At Grid Forensic Accounting, we obtain relevant financial information from a business and then use one or a combination of the following business valuation methods to value the business:

Market approach

Market capitalisation
This is worked out by multiplying a business’s outstanding shares (stock held by all its current shareholders) by the current market value of one share.

Income approach

Times revenue
Here, the stream of sales cash flows are valued over a particular time. The business’s economic benefit is then converted into a business value using a valuation multiple.
Earnings multiplier such as price-to-earnings (P/E) ratio
The P/E ratio is a tool investors use to determine market value of stock compared with a business’s earnings. For example, a higher P/E ratio indicates investors are prepared to pay a higher share price currently based on future growth expectations.
Discounted cash flow
This method assesses a business by taking into account the expected accumulation of interest from future cash flows.

Asset approach

Net book value/Net asset value
A business’s net value is calculated by taking the total of its assets minus the total value of its liabilities.
Liquidation value
This is the total worth of a business’s tangible assets (inventory, equipment, property, etc.) in the event of it going out of business and all the assets being sold.

The method we use will be determined by the type of business we are valuating. To discuss these and further examples as well as our processes in greater detail, please feel free to contact us or book an obligation-free consultation.

The Cost of a Business Valuation

Our costing for business valuations is based on the complexity of the business and the type of valuation report you require.

Grid Forensic Accounting provides 3 types of valuation reports:

Level 1 Valuation
This comprises a high-level overview of the business’s financial position through the analysis of financial statements and management accounts. Findings are presented in a letter format signed off by a chartered accountant (SA).
Level 2 Valuation
Comprises a Level 1 Valuation, as well as the following: confirmation of the accuracy of financial statements and management accounts, interviews with relevant personnel and highlighting red flags. Findings are presented in a report format signed off by a chartered accountant (SA).
Level 3 Valuation
Comprises a Level 2 Valuation, as well as the following: a full, line-by-line analysis of the business’s accounts, analysis of tax returns, and a business risk analysis. Findings are presented in an in-depth report signed off by a chartered accountant (SA).

We will need to discuss your specific needs in greater detail with you in order to provide you with an accurate cost estimate.