Information & FAQs
Business Appraisals Ltd provides independent business valuations that are clear, credible, accurate, and affordable.
1) Basic Principles?
- Business valuation is an art not a science.
- All valuations are opinions, and there is an element of subjectivity in every opinion.
- Business valuation should be unbiased, it is not an advocacy function.
- Business value changes with time and market conditions.
- Business value should be based on expected earnings, but it is not purely an accounting exercise.
- Curiosity is more important than calculating ability.
- The only true test of value is an arms-length sale on the open market after a reasonable marketing program.
2) What are "intangibles"?
- On average over 70% of the sale price of SME is for intangibles.
- These are "non physical factors that contribute to or are used in producing goods or providing services or that are expected to generate future productive benefits for the individuals or firms that could the use of these factors."
- Most do not appear on the Statement of Financial Position of the business.
- They range from trademarks, patents, domain names, franchise agreements, contracts, leases, databases, relationships, to general goodwill.
- To have value they must be identifiable and transferable.
- In many SME there will be personal goodwill pertaining to the owner and not transferable.
3) What is the difference between price and value?
- Price is what is actually paid for a business. Valuation is an opinion.
- Price may be affected by the motivations and negotiating skills of the parties.
- The terms of the sale can have a major impact on price… as can supply and demand and promotion.
4) What are "standards of value"?
- Fair Market Value is the most common standard and has been defined as - "the amount at which the business would change hands between a willing buyer and a willing seller when neither is acting under compulsion and both have reasonable knowledge of the relevant facts".
- Fair Value may be used in relation to a particular transaction which is not in the open market between two identified parties and the aim is to be equitable to both parties.
- Special Value is the value to a buyer who may pay a premium because of perceived synergies or economies of scale.
- Liquidation value - "the net value of a terminated business, with assets sold net of liabilities and cost of discontinuing operations. The liquidation can be orderly or forced".
5) Why do people buy businesses?
These ownership motivations are important value drivers.
- employment, i.e. buying a job, even for larger businesses
- independence, i.e. more personal control and freedom
- security, i.e. important in times of rising unemployment
- challenge, i.e. the opportunity to grow an enterprise
- profits, i.e. important for survival plus capital gains
- lifestyle, i.e. may involve a hobby or passion
6) SME are different to large businesses?
- SMEs comprise 97% of New Zealand businesses
- generally less than 20 full-time equivalent employees
- generally owner-operated with few management layers
- generally less than $5million annual turnover and a single location
- financial accounts are normally compilations and are unaudited
- may be inseparable from the owner
- 99% sell on an 'assets' basis, i.e. plant, goodwill, and stock
7) A typical engagement letter
8) What factors influence capitalisation rates?
- This will usually be established by using a "build-up" method from a base risk-free rate and adding increments for equity risk and specific company risk.
- Factors which may impact the Specific Company Risk Premium include:
- financial history and profitability
- time in business
- management requirements and quality
- organisation structure
- staff stability and availability
- future prospects
- business size
- competitive environment
- availability of finance
- security of tenure
- condition of plant and facilities
- customer spread
- market share
- reliance on key personnel
- marketing capacity
- breadth of products and services
- supplier relationships
- and so on