The Importance of Business Valuations

business valuations

“If business schools could offer just one course, it would not be on stock trading, the efficient market hypothesis or modern portfolio theory. Rather, B-schools should be encouraging students to learn the boring, but critically important, discipline of business valuation.”
Warren Buffett

I couldn’t go past this quote from Warren Buffet that so neatly points out the importance of business valuations. The oracle of Omaha definitely has a way with words and getting to the crux of the matter. Having a realistic understanding of the value of your business or the value of your shares in a business is critical to personal decision-making and planning. Of course privately owned businesses don’t have as easy a mechanism to determine market value as do publicly traded companies, however, there are many sound reasons for SME recruitment companies to become aware of their current value.

Why have a valuation done?
There are a range of reasons that business owners require a valuation. These include;

  • commencing a sale process,
  • resolving shareholder disputes,
  • for business planning & future decision-making,
  • determining tax obligations,
  • for litigation purposes(including divorce)
  • to access external sources of funding

While there are a number of accepted methods for calculating the value of a business they can vary substantially in terms of result. We believe an appraisal based on market value is the most relevant in the majority of circumstances. This provides an up-to-date view of the business’ value in the event of a market sale. Ultimately any business is worth what the market is willing to pay at a particular point in time. However well presented it is; a valuation that is well above the market norm is not going to influence experienced buyers to pay more.

Business Sale

Having a market valuation prepared prior to starting a sale process is a key step in understanding your business’ position. If properly undertaken the valuation will give an accurate gauge to the price range you may achieve and is an essential starting point for any future negotiations. It can also be a reality check for those whose expectations are out of line with current market circumstances. In those cases an honest assessment provides the best means for decision-making: continuing with a sale; or take steps to improve the value in your business for a future sale.

Departing Shareholders

There are times when one shareholder wants to move on and exit the business. This may be an amicable parting or arise from months (or years!) of disagreement between the owners. Usually a departure means that one party wants to sell their shares and that is most likely going to be to other existing shareholders. Even in amicable situations determining a price for the shares of a departing director can be challenging. An externally prepared market valuation is a very appropriate starting point to determine the business’ value and those of minority interests.

Business Planning

As part of forward planning any business should be aware of their market value in order to make the decisions necessary for the future. Understanding the current position enables business owners to make choices about the approach they want to take for their business in the future.

Summary

At HHMC we stress that a business valuation for Recruitment companies needs to reflect the industry’s relevant market circumstances and status. Privately owned recruitment companies are affected by a range of determinants that impact on pricing at the time of sale. Analysing the factors that determine pricing requires an intimate knowledge of the Recruitment industry and the comparative values achieved around the country.

This is a guest post by Richard Hayward of HHMC.

Richard is a principal of HHMC Australia, a specialist merger & acquisition consultancy focusing on the recruitment industry. Richard has an extensive background at senior levels in the recruitment sector having worked with international, national and smaller local companies for over a decade before joining HHMC. His clients, as either buyers or sellers, include companies ranging from blue collar industrial, ICT, banking & finance, accounting, business support, and operations recruiting businesses.

Contact Richard at [email protected] or call  +61 411 488 544

Photo by Bob Jagendorf

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