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Business owners often have questions about company valuation issues and one of the questions which often get asked is, “What exactly is fair market value?”

Fair market value of a business can be defined as the monetary value at which the business would exchange ownership between a willing buyer and a willing seller, neither being under compulsion to buy or sell and each having reasonable knowledge of the relevant facts.

In normal business terms fair market value is the value someone like a third party unrelated investor would use to evaluate how much the Business is worth when they have reasonable knowledge about the industry and how the business is run.

Fair market value can be determined by analysing the historical and projected cash flows of the business. Future cash flows are then discounted back to the present value. It also takes into consideration the assets and liabilities as well as the potential growth of the industry or economy.

Other Specific Factors

Any other factors specific to the business are also taken into account. The value could be discounted for:

• Lack of control
• Size of the business; and
• Lack of marketability depending on the situation.

Fair market value is a term business valuation experts use in their reports and refers to the value of a business on the open market.

Here are some reasons, why a business should identify their fair market value.

Change in business structure

Over time a business may need to change its business structure. Determining the fair market value of the Business may be a requirement of the Australian Taxation Office prior to the assets being transferred to another entity.

Disputes and Legal Proceedings

In legal disputes there is often a requirement to obtain an assessment of fair market value. Typically fair market value valuation reports are required in family law/divorce, partnership disputes, shareholder disputes and inheritance disputes.

Long Term Planning

Fair market value is a useful metric which can be applied in the long-term planning of a business. For instance businesses involved with succession planning can transfer shares to a related party or employee. The starting point for succession planning is to find out what the business is currently worth.

After identifying a successor the next step is to find out the buy-out value of the business. Parents looking for children to take over the business may be relying on the family business to fund their retirement.

The children may have different ideas about where they want to take the business. A succession plan helps align the family interest and avoids conflict.

The valuation of a business can change substantially in relatively short periods of time. Working out the fair market value helps in making appropriate long-term plans relating to transfers, divisions, and consolidations.

Are you looking for a professional business valuation provider to help you identify the fair market value of your business? One of Australia’s top business valuation firms, Rushmore Group is renowned for providing business appraisal services for more than 10 years and offers assistance for both large and small business valuations. If you’re looking to get a business valued please call us on (1800) 454 622 today for more details.

Handling and managing a business is definitely not a walk in the park. You always need to be alert and prepared to address any issue that may arise. After a few years of operating the business, are you wondering how much it costs now? Do you want to know how far you have achieved after all those months? In that case you should seek business appraisal assistance.

Availing of a  business valuation service is pretty straightforward and easy these days, thanks to the internet.

However, you should not pick just any business valuer to do your bidding. You have to make sure that he or she is good and trustworthy enough to conduct a professional business valuation. Here are four qualities you should look for in a business valuer:

1. Experience – Before working with anyone, make sure he or she has enough experience in using a business valuation formula. Check his background and work history to know more about whom you are working with.
2. Affiliation – One way you can check a professional’s track record is by finding the different groups and associations where he is connected. Usually, these groups will have an entire roster of their membership so you can check.
3. Reputation – What do people say about the firm or specialist? Are they satisfied with the service, or did the ‘expert’ make a mistake? You have to know how good your business valuer would be.
4. Rates – Finally, you should check the rates of the firm or individual. In order to make a more informed decision, check 3 or 4 business valuation firms and get the average of their professional fees.

As you may have observed, rates and fees for business valuation should not be the first consideration. If the rate is too low, then the service provider is probably not that good. Availing of the lowest rate may lead to mistakes, which means inaccurate and unprofitable results for your business.

In case you are looking for a top-notch valuer, one of the top business valuation firms in Australia is the Rushmore Group. Established in 2006, the Rushmore Group has been using effective business valuation methods over the years, to the delight of its clients. To know more about this firm, just dial (1800) 454 622 or fill out this form.

Earnings Multiple Valuations are suitable for a range of entities that are consistently profitable.

In most business valuations that we undertake we use an EBIT multiple on which to capitalise the future maintainable earnings. In some cases we will use an EBITDA multiple to capitalise maintainable EBITDA.

An earnings multiple valuation is generally not  appropriate where:

• The business or entity has made losses.
• The business is of a type where it may be appropriate to value the business using a different technique (e.g. a financial planning practice on a multiple(s) of recurring revenue or a restaurant on a capitalisation of weekly turnover).

However its important to note that every business valuation engagement is different and there may be an exception to the above guidelines.

An earnings multiple valuation is considered a proxy for a discounted cash flow / net present value valuation. A net present value valuation is considered the most academically sound valuation (albeit there are a number of challenges to using the technique particularly with small to medium enterprises).

If you would like further information about the use of an earnings multiple valuation or a business valuation in general, then we would be delighted to speak with you further.

Rushmore are specialist small to medium market business valuers. We offer a fixed fee service of $4,990 per valuation plus GST and our reports are suitable to be used for taxation, court, buying a business, selling a business and other purposes.  Please call us on 1800 454 622 for more information.

Yesterday I was on the Gold Coast to meet with a client and discuss a forensic accounting matter. One of the advantages of offering a national forensic accounting service is that it gets me out on the road and talking to clients and seeing them face to face.

Another aspect of travelling around Australia is that it allows me time to take time out and think of the “big issues” facing our clients and our business in general. Yesterday my thoughts kept returning to automation, processes and how forensic accounting can benefit from this.

Many practitioners approach forensic accounting from an ad-hoc perspective and expert reports are built up in layers over the process of weeks or even months. In many engagements this is the right approach, however I wonder how much “knowledge” that is built up in one report is actually transferred into the next report and subsequent expert reports. I wonder if with automation, computer programming and databases one could build up the foundations of a report in a much faster, more accurate and ultimately more efficient manner.

I can see a future where the forensic accountant sits down at a computer and builds a report not beginning in a narrative “report” style approach but rather opening a software program and entering data, selecting pre-formatted sections and building the report up in a “database” and then nearing completion exporting the report to the narrative form.

Using computer programming and automated processes is currently used by Rushmore Forensic to initiate business valuation reports and one of the benefits of this approach is that we can pass on the savings in time to our clients. This is approach has meant that we can offer a business valuation report for a fixed fee of $4,990 plus GST. The same report without automation and processes would be more than $8,000.

Yesterday’s trip has inspired me to invest more time in building automated solutions that ultimately will result in a better expert accounting report at a lower cost to our clients.

Welcome to the brave new world of forensic accounting!