Having determined what is to be valued, at what date and for what purpose, the business valuation assignment will consider the following:

• Standard of value – the type of value being used to value the business
• premise of value – going-concern or liquidation value
• ownership characteristics and size of interests
• marketability of the business
• form and extent of the report – conclusion of value or calculation of value
• any special requirements.

There are several reasons to value a business and, in recent years, the need has increased significantly. Reasons why a business valuation may be necessary include merger, acquisition, stock-market flotation, liquidation, financial reporting, tax planning, estate planning, and dispute resolution.

Types of valuation

Each valuation is different and depends very much on the context in which it is carried out. Local laws and regulations will also have a bearing.

There are three ways to approach a business valuation. The purpose of the valuation will mainly determine which method is appropriate.

Income-based approach

This approach values the business based on a present-day value of future earnings or cash flows. There are two main methods:

• capitalisation of future earnings, which takes a projection of future earnings and divides it by a capitalisation rate
• discounted future earnings, which adjusts projected future earnings for the time value of money.

Asset-based approach

This approach values the business as the total value of its assets, adjusted to fair market value – the price a willing independent buyer will pay and a willing seller will accept.

Market-based approach

This approach works on the basis that the value of a business is that of a comparable business in the same market. The most frequent methods of market-based valuation are:

• guideline public company method – based on a comparison of the business with similar publicly quoted companies
• guideline company transactions method – based on analysis of published data on transactions in public and private companies
• guideline sale of interests method – based on analysis of sales of interest in other comparable businesses.

Types of engagement

When you appoint a valuation analyst there are two versions of engagement: a valuation engagement and a calculation engagement.

Valuation engagement

The valuation analyst is free to decide the appropriate approach and method and the resultant valuation is known as a conclusion of value, expressed as a single value or range of values. In effect, the valuation analyst is giving an expert opinion on the value of the business.

Calculation engagement

The valuation analyst will agree the approach and method with you, the business owner. A calculation engagement is not as rigorous as a valuation engagement and the resultant valuation, known as a calculation of value, is merely a product of the processes that you have agreed with the valuation analyst.

The valuation analyst is not giving an expert opinion and the calculation of value will likely differ from a conclusion of value.

Costs

Valuation costs depend on the complexity of a given valuation engagement. You are paying for the valuation analyst’s time and fees will be calculated using an hourly rate. A valuation engagement tends to be more complex, takes more time, and costs more than a calculation engagement.

Valuation standards

In the United States, standards have existed since 1989 when the Appraisal Standards Board (ASB) set out the Uniform Standards of Professional Appraisal Practice (USPAP). The American Society of Appraisers, the American Institute of CPAs, and other North American appraisal bodies publish their own standards but they are mostly consistent with USPAP.

More and more international markets are now adopting these valuation standards. Several governments have made USPAP and the ASA’s Business Valuation standards mandatory for business valuations involving privatisation. Further, the United Nations, the World Bank, and other international business organisations have actively sponsored presentations of USPAP and ASA’s Business Valuation standards.

When valuing your business, for whatever reason, it is important you use a properly qualified and experienced valuation analyst and that the valuation assignment is clearly defined and properly conducted.