The valuation field is littered with contradictory reports and calculations, as many experts will tell you it is an art as well as a science. The business valuation process is as much about uncovering the right information as well as doing the calculations. Getting agreement on the value of a business is as much about getting agreement on the facts and the appropriate interpretation of the facts as it is about following a defined process.
So the valuation process can often take time, and follow a rigorous path of:
- Data collection.
- Data analysis.
- Financial projections.
- Industry and market assessment.
- Business strategy.
- Value calculations.
The reason for the comlex process is that valuation is as much about discovery as it is about calculation. The business value must understand the numbers and the business drivers in terms of the client. This may be different whether the client is a vendor or a buyer.
Often the business valuer must interpret information that may be 1-3 years old or more and hence it is an iterative process with the client to understand how particular details impact the value of the business.
In many cases the business owner or buyer already has a value range in mind – what they need is their interpretation of business value cross-checked. This is where a fast business valuation helps.
So what is a fast business valuation?
A fast business valuation that has some detailed analysis will usually take 24-48 hours. Often a quick calculation can be completed in 1-2 hours, however the discovery process can take longer.
There are three key steps in a fast valuation:
- Gather past and Year to Date financial information.
- Ask some key questions about business profitability, growth, business processes, competitive advantage and industry issues.
- Systemised process of calculation and reporting.
Once the basic calculations are complete, the business valuer needs to consider the outcome from different viewpoints. This is when time is needed, and hence a good valuation must take at least 1-2 days for the best outcome.
What are the limits of a fast business valuation?
A fast business valuation does not help when it is being relied upon in legal or commercial disputes. In these cases the valuation must be based on solid evidence and reasoning. The interpretation of financial statements, business and industry issues and other factors must be taken into account when producing a defendable report.
Other limitations include:
- Lack of clear and credible financial reports available.
- A business that has had dramatic changes in profit performance (such as going from large losses to profits or vice versa).
- A business whose value significantly depends on intangible factors such as key owner relationships, intellectual property or goodwill.
- Unavailability of the business owners to discuss the business.
What can a fast business valuation be used for?
At it’s simplest level, a fast valuation will confirm in the buyer or vendor’s mind that they are making the correct decision. This means negotiation can be swift and concise. It gives the client power to be able to definitively set the boundaries in negotiation, and can reduce the time taken to reach a decision.
But it will also uncover the opportunities for the business to increase its value. This is useful to the buyer in understanding what they bring to the table and will help make the vendor feel confident they are defending the value of the business with the right strengths and opportunities.
It can also help confirm the boundaries in settling disputes between business partners. Disputes are not always over a 5-10% difference. It is more likely they differ by several orders of magnitude. A fast business valuation can resolve this issue in less than 2 days. In fact, often putting shareholders through the valuation process helps resolve a dispute, as they come to a mutual understanding of the value and where each shareholder differs in arriving at a a valuation figure.
What about investing in a business?
This is one of the powerful areas of a fast business valuation – it can help indicate if an investment in an existing business will increase its value or not. The valuation can not only tell you what the business is worth now, but also what areas the investment will improve, and hence what the new value of the business will be.
It is crazy to invest $1M in a business but the value only increases by $750,000! A fast valuation can help identify the aspects about a project that will result in a loss of value rather than an increased value.