How much does it cost to value a business?
As a business owner, understanding value is very important. Businesses are unique and each present their own intricacies and challenges, so valuations can differ based on complexity and depth.
- Valuing a simple business will likely cost around $5,000.
- For a more complex business, with multiple divisions and sophisticated business structures, this figure can range between $10,000 and $50,000, depending on the depth of the valuation.
In this piece, we delve deeper into the different factors that can affect cost, key questions you should prepare for when considering a valuation and the types of valuations available. If you'd like more information, or a business valuation of your own, contact Nash Advisory today.
How do valuations work?
For a successful and accurate business valuation, your financial advisory firm will generally ask for:
- The last three years of financial accounts, prepared by an accountant
- A forecast or budget for the next 12-24 months
- A list of top 10 customers by revenue
- A list of top 10 suppliers by cost
- A list of top 10 products or services by product
- A breakdown of profit by product or service
- Organisational structure and employee details, including role, salary and tenure
With that information, the firm you engage should be able to form a preliminary view on value. This will also provide an indication on factors that will increase or decrease value, such as:
- The nature of any contracts with customers and suppliers
- Intellectual property
- New product development
- Key gaps in the organisational structure
What are the different types of valuation?
Business valuations can range from preliminary guidance, all the way through to a well executed and researched valuation report. Business valuation methods and formulas can also differ depending on the type of business.
Preliminary valuation - Free
Preliminary valuation is based on turnover or profit. Any advisor, accountant or broker can give an indication on value based on these factors. This approach, while useful as a guideline, can misrepresent the value of your business. Simple valuations do not consider all factors that are important.
- The valuation is typically verbal, with the aim being to sell your business.
- Simple valuations are for businesses with an enterprise value of less than $5 million.
Comprehensive valuation report - $5,000 - $30,000
This type of report is generally provided by Corporate Advisors or Mergers and Acquisitions Advisors. Comprehensive valuations provide a thorough understanding of the fundamentals that affect value. Firms performing comprehensive valuations generally have access to large databases for market information on pricing and recent transactions.
- Comprehensive valuation reports focus on conducting robust analysis.
- Buyers of businesses in this space would typically be large trade organisations or private equity firms.
- These types of reports generally target companies with an enterprise value of between $10 million and $100 million.
Detailed research report - $20,000 - $50,000
Detailed research reports are typically generated by well resourced research firms who focus on a specific sector or company. The analysis undertaken is extremely detailed and primarily focused on identifying mispricing in markets for large investors such as trade companies or private equity firms.
- The analysis is generally accompanied with sophisticated pricing models from investment banks.
- These types of reports target companies with an enterprise value over $100 million.
A valuation can be a stressful and time-consuming process for a business owner, so it is important to understand what your objectives are. Different objectives seek different outcomes, and therefore require different levels of analysis.
- Are you valuing the business for sale?
- Are you valuing to get financing from a bank
- Are you trying to resolve a shareholder dispute?
To get a ballpark estimate for your business worth, a preliminary valuation may be able to assist you. As noted above, the estimates can vary substantially from the actual value.
A comprehensive valuation report should be able to guide this decision making process, as well as assist in identifying areas for improvement ahead of a sale.
While the most detailed option may be a detailed research report, many business may struggle to find value in a report of this nature.