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.
Business valuations can be complex, and require an expert touch to be as accurate as possible. If you'd like to know more about the true value of your business, get in touch with Nash Advisory.
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.
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.