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Business Valuation FAQ

What is the difference between a business valuation, valuation assessment, a business evaluation and a business appraisal?

  • In general the terms “business valuation” and “business appraisal” are the same. Business valuation has become a more accepted term which denotes assigning a reasonable “fair market value” on a business as a going concern, or the value of a start-up business.  There are now national (APES 225) and international guidelines (IVSC) on the minimum contents of a business valuation.
  • There are three critical requirements for a business valuation to be accepted by external organsiations:
    • Does the business valuation use standard and acceptable methodologies, data and calculations?
    • Is the business valuation report documented to a sufficient standard to enable any other business valuation professional to reproduce the calculations and the same results?
    • Has it been prepared by someone with appropriate experience in conducting business valuations within the particular industry sector.
  • A valuation assessment is typically a valuation conducted with a lesser standard of reporting requirements.  Valuation assessments may arrive at the same answer as a business valuation, but rarely will the documentation support scrutiny or reproduction by another valuation professional.  Valuation assessments are rarely acceptable as evidence in any commercial dispute.
  • A business evaluation is more an assessment of the overall performance and strategy of the business and typically used for business development purposes.  A business valuation may provide similar information, but often produced for a different purpose.

Why is a business valuation necessary?

  • When you sell or buy a business, a valuation helps to ensure the transaction is completed at a fair price.  Even if the agreed price is not considered “fair market value”, the valuation can document why that is not the case.
  • A business valuation can help defend the price you want for your business or highlight why the business is not worth what the vendor is asking.
  • A valuation can assist in settling commercial disputes and disagreements between shareholders or business partners.
  • A business valuation is often needed in matrimonial separation to arrive at a total asset pool that is to be divided amongst the parties.
  • A business valuation may be required to determine the estate value of a deceased person.
  • In other cases a valuation is needed to demonstrate transactions have happened at fair market prices.  Fair market value is meant to be the price for which a willing buyer and a willing seller will exchange an asset as if they are operating at arm’s length and without coercion and fully aware of the circumstances.
  • Whilst both ASIC and the ATO allow related party transactions (such as sale of your share of the business to your partner, a family member or other close business associate), they expect the transaction to still happen at a fair market value.  A business valuation from an independent party is used to determine the fair market value.
  • In some cases, taxation liability is based on the value of a business (even SME businesses).  The ATO want to make sure the appropriate amount of tax is being paid and hence will require the determination of fair market value.
  • These circumstances include:
    • Capital Gains Tax on sale and purchase of a business.
    • Calculation of GST on sale of a business (where applicable).
    • Sale of shares in a business to other parties (for tax reporting purposes), especially related parties.
    • Other changes to capital structure or shareholdings.
    • Business consolidation (such as changes in the holding value of businesses or changing the carrying value of goodwill on a balance sheet).

Why do I need to submit a business valuation to the ATO?

  • The ATO shall request business valuations when there is some indication that there is a risk of insufficient tax being paid, or when supporting evidence is required in relation to submitted financial or taxation reports.
  • In many cases an ATO audit may request a business valuation to support other documentation that you have submitted.
  • If you already have a business valuation completed to ATO standards, then the ATO will have more confidence that the assessments or documentation you have submitted is correct, and will not request further information.
  • The more the ATO investigates your business, the more it is likely to cost in terms of professional advisor fees and potential unpaid tax liabilities.

Why does ASIC have any influence over my business valuation requirements?

  • Many SME’s are legal entities where the liability of the owners of the business is limited to the extent of the equity provided.  These companies are subject to Corporations Act just like a listed entity, although the reporting requirements are considerably less.
  • Directors and shareholders have legal requirements under the Corporations Act to manage and report the affairs of a business according to requirements of the Act.
  • These requirements include:
    • Reporting of such items as shares in other businesses, carrying value of goodwill or shareholder investments at an appropriate value.
    • Related party transactions occur at a fair market value.
    • Changes in capital structure of the business or shareholdings reflect appropriate market values.
  • ASIC will require a business valuation to support transactions or changes in financial structure of your business.

What is a formal valuation and what makes it different from others?

  • A formal business valuation is one that:
    • Meets certain standards of disclosure (such as APES 225), court evidence requirements and compliance with standard valuation methodologies and practices.
    • Has sufficient documentation to support any analysis, assumptions and allow other professionals to repeat the analysis and obtain the same result.
    • Will be used to settle legal or commercial disputes with related or external parties (such as ATO or ASIC).
  • A formal valuation will also take into account changes in the external business environment that may impact the value of the business.  These include an assessment of industry or local competition, changes in market trends, government regulation or technology and economic influences.

Who can value a business and do you need a license or qualification?

  • ASIC and the ATO do not require any formal qualifications or professional memberships.
  • The ATO states that a business valuation report should be prepared by “…a suitably qualified and experienced person in relation to the asset being valued“.
  • ASIC is also not prescriptive on who is considered an expert, but suggests that the expert use a number of methodologies to assess the value of the business.
  • Under current legislation there is no statutory authority that requires business valuations to hold particular qualifications or experience.
  • Each of our directors are members of professional bodies that require our expertise and knowledge to be maintained and updated with current professional standards.

Why should I use SMART Valuations to value my business?

  • Valuing SME’s is all we do. We are experts in small business, valuations and taxation.
  • Our directors have a combined experience of more than 70 years in small business, valuation practice and taxation advice.
  • Our directors are involved in setting the standards for business valuation in the country through involvement on with the CPA Valuation Panel, membership of the ATO’s valuation panel, membership of the Institute of Chartered Accountants’ Business Valuation Special Interest Group and other professional bodies.
  • By specialising in business valuations we are able to provide our clients with professional, reliable and fast valuations at a quality delivered by the “Big Four” accounting and consulting firms but at a competitive SME-affordable price.

Can my accountant value a business?

  • Your accountant will not have the independence, impartiality nor experience to provide a credible, reliable formal valuation.
  • Many accountants do “valuations by the numbers” and do not take into account your industry trends, your business strategy or the impact of your business model on the business valuation.
  • Many accountants do not understand the requirements of a formal valuation, lack the experience of cross examination of a business valuation in court matters nor appreciate the intricacies of ATO documentation requirements.
  • Accountants, whether they are chartered accountants or not, do an excellent job in their specialty of management accounting, tax and audit advice.  Very few chartered accountants offer the expertise and experience to value a business because it is not their specialty.
  • Your accountant can often help us with a valuation because of the detailed knowledge and history they have with your business and your financial information. Your accountant will often be your trusted advisor, but your business valuation is best handled by a firm which specializes in nothing but business valuations and whose track record includes many years of valuation experience and up to date knowledge of the latest practices and standards.

What is Fair Market Value and what other types of value exist?

  • The definition of “fair market value” that has been tested and accepted under Australian courts is:
    • The price that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller acting at arm’s length.
  • Other types of value include:
    • Investment Value / Strategic Value
      • The value of a business that a particular investor or strategic buyer is willing to pay as a result of opportunities to achieve a significantly increased return on investment.
    • Liquidation Value
      • The value of the tangible and intangible assets that can be sold as either individual items or as a single entity where the business is unable to continue operation as a going concern in its current circumstances.
      • This value is often the “fire sale” value where assets of the business are sold under “distressed” conditions, in an “as is where is” state.
  • In most circumstances the value of a business asset is to be assessed at fair market value.

What are the acceptable methodologies used for assessing the value of a business?

  • There are essentially three approaches at calculating the value of a business: Cost approach, market approach and income approach.  Each method will be appropriate in different circumstances.
  • Cost Approach:
    • Based on the cost of establishing or building the business or the value of the net assets of the business.
    • Calculation methods include:
      • Net Asset Value.
      • Total Book Value.
      • Replacement Value.
  • Market Approach:
    • Use of an established market place where the prices of shares and securities of businesses are reported.
    • Based on comparing the value of the business to other comparable businesses or sale transactions.
    • Calculation methods include:
      • Earnings Multiple (applied to historic cash flows or Future Maintainable Earnings).
      • Market Prices method.
      • Comparable Companies Multiples method.
      • Comparable Transactions Multiples method.
  • Income Approach:
    • Use of past and / or future cash flows to assess the value of the business.
    • Calculation methods include:
      • Discounted Cash Flow method.
      • Capitalisation of Earnings method.
      • EV / EBITDA method.
      • Excess Earnings method (combination of both asset and income approaches).

How can you compare the calculated value of a small business with other sales or acquisitions?

Public companies and many large private companies are subject the principle of “continuous disclosure” and access to information to allow a fair and informed decision on value – or the share price.  SME’s don’t have this luxury, but comparison

The comparables transaction method is an important cross check against other value calculation methods, and with the right information helps provide a level of “reality” to the value of SME’s.

Information is available through a number of sources, the key ones being:

  • Our network of business brokers, accountants and commercial lawyers whom have been involved in the sale of other SME’s or whose clients have bought or sold small businesses.
  • Access to databases such as
  • Online business broking websites that quote prices of businesses for sale, where additional information on the nature and size of the business is available for accurate comparison.  This information is used as a maximum available sale price only and not as an indicator of an actual sale value.

A large degree of caution needs to be placed on an SME Comparable Transaction analysis due to the lack of a regulated source of information.  This method is best used as one that supports a valuation rather than the sole determinant.

What typical factors affect the value of a business?

  • Nature of how revenue is generated:
    • What trends in revenue have occurred in the past and what is expected in the future?
    • How does the business attract and retain customers?  What is the loyalty of the customers?
    • What resources and systems are in place to support ongoing sales?
    • Profitability of the business
      • What has the profitability been in the past and what is expected in the future?
      • What investments and initiatives have been implemented that will increase profit margins?
      • Stability
        • Does the business face significant changes in its external environment such as technology, changing market demand and regulation?
        • What uncertainty does the business face and how will this affect cash flow?
        • What competition exists within the industry and will impact the future cash flow of the business and its stability?
  • Competitive advantage
    • Does the business have a well-defined and leveraged competitive advantage that is different to other competitors?
    • How is this competitive advantage used to generate superior earnings?
    • How is the competitive advantage leading to a better offering compared to competitors?
    • Industry lifecycle:
      • Is the industry in a natural decline or does it have a growing demand?
      • Will technology change the industry lifecycle in the near future?
      • Will changes in the industry lifecycle impact future earnings?
      • Reliance on owner-operator:
        • Does the business rely on its owner and/or key staff?
        • How will the earnings of the business be affected by the owner leaving the business?
        • What systems and procedures are in place to support and replace the owner / key staff?