6 steps to a thorough business valuation

June 12, 2023

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Business valuations determine the true worth of a business, and in the context of forensic accounting are considered critical. This process is required for a range of purposes involving parties that have conflicting interests and are being advised by their own valuation experts. This could include sale of business, admission of new shareholders, shareholder disputes, family law disputes, corporate restructures, and compliance with taxation obligations.

Undertaking a valuation for forensic accounting purposes requires the expertise of experienced professionals who have a deep understanding of the factors that influence the worth of a business. This expertise should be based on both the years of experience and the range of valuations they have undertaken across different industries and purposes.

Types of business valuation

The need for a business valuation can arise for many reasons, many of which will require a different approach. For example, the valuation of a business in a sale will usually be undertaken on a fair value controlling interest basis, whereas a valuation for the admission of new shareholders could be based on a fair value minority basis, which considers the value of a minority stake in the business. In contrast, in a business purchase, the valuation could include being based on the incremental contribution, which considers the additional value that the business will bring to the acquirer.

In shareholder disputes and family law disputes, the valuation should be based on the fair value or value to the owner. In corporate restructures and for compliance with financial reporting obligations, the valuation should be based on fair market value. Similarly, in compliance with taxation obligations, the valuation should be based on the value that is required for tax purposes.

For expert witnesses in litigation/mediations and in the critique of opposing expert witness valuations, the valuation analysis should be based on a detailed analysis of the factors that are relevant to the dispute. This requires an experienced valuation professional who can identify the key issues and provide a clear and concise analysis of the valuation.

Value explained

A key matter in undertaking business valuations is properly determining what is being valued and for what purpose. The valuation can be based on various parameters such as enterprise value, equity value controlling interest, equity value minority interest, value of a special class of shares, and special value. Each of these require a consideration of various relevant factors and a tailoring of the approach used in the valuation. An experienced valuation professional can help in identifying the most appropriate approach and help avoid the pitfalls that may seriously reduce the persuasiveness of the valuation.

A formal business valuation is not a simple or quick task. It is a complex process that requires a detailed understanding of the business, economic, industry and market conditions in which the business operates, as well as detailed financial analysis of historical and likely prospective financial performance and financial position of the business, and its owner — be it an entity or individuals. A thorough business valuation must acknowledge:

  • Details of the business to understand internal business risks.
  • Economic, industry and market analysis to understand external business risks.
  • Detailed financial analysis of historical financial performance and financial position, including earning and expense ratios (compared to industry benchmarks), trends, productivity of resources, appropriate measure of earnings (e.g., profit after tax, earnings before interest and tax, earnings before interest, tax, depreciation, and amortization, free cashflow, etc.).
  • Whether all expenses (especially related party rents, owner/manager salaries, intergroup transactions) are at a reasonable market rate.
  • Specific factors that may have materially impacted past financial performance that need to be normalised.
  • Potential future earnings and the reasonableness/riskiness of the assumptions underlying forecasts or projections.

A business valuation requires the expertise of experienced valuation professionals to consider and determine the key issues above. When it comes to forensic accounting in a litigation context, this becomes even more critical as the valuation is likely to come under robust scrutiny which can impact the settlement of a matter. Whether it is for sale of business, admission of new shareholders, shareholder disputes, family law disputes, corporate restructures, compliance with taxation obligations, or expert witness in litigation/mediations, an experienced valuation professional is crucial to ensure an accurate and fair valuation.

A tailored approach

At Sedgwick, we are committed to providing the highest level of expertise to our clients and ensuring that their business valuations are accurate and reliable. Our forensic accounting team has a proven track record of providing expert business valuations for insurance loss adjusting. Using their knowledge and expertise, our valuation professionals can undertake a detailed analysis of the business, economic, industry and market factors that influence the value of a business across different industries and purposes.

Learn more — explore our forensic accounting services brochure or contact us at [email protected] or [email protected] for more information.