Valuing a Business Before Selling It

How is a valuation different from an appraisal and from the sale price?

Owners often use “value”, “appraisal” and “price” as if they meant the same thing. They are three separate numbers.

• The valuation is an independent, reasoned opinion of what the business is worth at a stated date for a stated purpose, with the earnings, assumptions and method written down.
• The broker appraisal is an opinion of the price the business is likely to achieve on the market. It is usually offered before a listing is agreed, and it reflects what the broker expects buyers to pay.
• The sale price is what a particular buyer and seller agree after negotiation, due diligence and structuring. It can land above or below either of the other two.

Our guide on business valuation versus business appraisal compares the first two in detail. For a sale, the valuation tells you where you stand, the appraisal tells you how the market may respond, and the price is the result of the process.

Why value a business before you sell it?

A pre-sale valuation does four jobs.

It sets realistic price expectations

Many owners carry a figure in their heads: what a friend sold for, what they need for retirement, or what they have put in over the years. A valuation replaces that with a reasoned figure based on the earnings a buyer can expect to keep. It is better to learn the gap now than after months of unsuccessful marketing.

It shows the earnings a buyer will test

Buyers do not pay for reported profit. They pay for normalised earnings, after a market wage for the owner’s role and after removing private expenses and one-offs. A valuation does that work in advance, so the figures you take to market already answer the first round of buyer questions.

It finds issues while you can still fix them

The valuation shows what a buyer is likely to mark down: dependence on the owner, one large customer, contracts that are verbal or about to expire, a sole licence holder, untidy records, plant due for replacement. Some of these can be fixed in a year or two and some cannot, and you want to know which.

It informs deal structure

Knowing what the business is worth and what drives that value helps you decide what to ask for: how much up front, how much deferred, what a handover should look like and where you can give ground. It also gives your accountant and lawyer a shared reference point, because decisions about structure, timing and tax are easier when they can see how the value is built.

What will a buyer’s due diligence look at in a trade business?

Due diligence is the buyer’s check that the business is what it was described to be. Trade businesses attract particular questions because so much of the value sits in people, licences and relationships rather than in assets that can be counted. Due diligence tends to cover the following.

• Whether the earnings reconcile to the tax returns, bank statements and activity statements, and whether each adjustment can be supported.
• The owner’s role: quoting, supervising, working on the tools and holding the key relationships.
• Customers: concentration, tenure, contracts, renewal dates and any change-of-control clauses.
• Licences and insurances: who holds each licence, whether it stays with the business, and the claims history.
• The workforce: employees, apprentices and subcontractors, entitlements owing, and how each worker is classified.
• Vehicles, plant and finance: ownership, condition and what is owed.
• Work in progress, retentions, warranty and defect obligations, and the quality of debtors.
• Compliance: GST, payroll, superannuation and workplace safety records.
• Premises and leases, and whether any related-party arrangements are at market rates.

A valuation does not replace a buyer’s due diligence, but it covers much of the same ground. It gives you the chance to find a problem before a buyer does.

What does a pre-sale valuation show in practice?

The example below shows why an owner’s own view of earnings and a valuation basis can sit far apart. All figures are illustrative, and the 3.0 times is an assumption chosen to show the arithmetic, not market data.

None of these adjustments is unusual. What matters is that each can be supported by records: a description of the owner’s role for the manager cost, a market rent assessment for the premises, and the invoices for the one-off legal costs. An adjustment a buyer can verify is worth more than a larger one they cannot.

How does deal structure affect what you receive?

The headline price is only part of the outcome. Structure changes what you receive and when, and what you remain responsible for.

• Asset sale or share sale. A buyer takes the business assets and goodwill, or buys the shares in the company that owns them. Liabilities, licences, contracts and tax are treated differently in each, and buyers and sellers often start from opposite preferences.
• Deferred and contingent payments. Part of the price may be paid later, or only if earnings hold up after the sale, which is known as an earn-out.
• Vendor finance. You lend part of the price to the buyer, which makes you a lender to the business you used to own.
• Working capital, stock and work in progress. These may be included in the price or settled separately at completion.
• Handover and restraint. How long you stay on, in what role, and what you agree not to do afterwards.

The tax result of each structure is different, and the small business CGT concessions have conditions of their own. Those are questions for your tax adviser, and our guide on business valuations for CGT explains where a valuation may come into that conversation. Your lawyer should advise on the terms of the contract itself.

When should you get a valuation before selling?

The best time is 12 to 24 months before you plan to list. That is long enough to act on what the valuation finds, and long enough for a buyer to see the result in the numbers.

Buyers look at several years of results, so a clean financial year counts for more than a clean quarter. Changes that fit this window include the following.

• Separating private expenses so that a full year of accounts is clean.
• Putting key customers on written agreements and renewing those about to expire.
• Training or hiring a second-in-command so the business does not depend on the owner’s daily involvement.
• Adding licence cover beyond the owner.
• Settling debtor, tax or employment issues.
• Replacing or servicing plant that is due.

Some things cannot be fixed on any timetable, such as the age of the customer base or a downturn in the local market. For those, the value of a valuation is an accurate picture, so that you can price the sale and plan around it.

A valuation closer to the sale is still useful for expectations and for preparing an information pack, although fewer of the issues can be fixed. A valuation is also as at a date, so if trading changes materially or a long time passes before you list, ask for it to be updated. Our guide on preparing a trade business for valuation covers the information side, and valuing a business with owner dependency covers one of the largest fixable issues.

What does a pre-sale valuation from Green Standard involve?

An Independent Business Valuation is $1,995 + GST. Intake starts online at our start page. You then upload documents through a secure client portal, we provide a draft report before it is finalised, and the typical turnaround is 3 to 7 business days once all required information has been received. Complex matters can take longer.

The business sale valuation page describes how the engagement is set up for a sale, and the pricing page lists the fees. A valuation does not set your asking price, find a buyer or give tax or legal advice. Those belong with your broker, tax adviser and lawyer.