How much would you pay for a business? A lot of people feel that when you’re buying a business, you are buying a future stream of income. And in many ways, this is true. But because it is so difficult to project what that income will be, it is vital to get as much information as you can for an accurate business valuation. After all, nobody wants to get caught short after they’ve paid out hundreds of thousands – maybe even millions – of Rands.
The company balance sheet is a good place to start when looking at the value of a business. Although the company accounts won’t tell you how much a business is worth, it will tell you how much it can be worth to you – both now and in the future. So while the balance sheet is not the only thing to look at, it is the best starting point, and a really good indicator.
It is critical to look at the past performance of a company – certainly the most recent few years. The owners’ equity amount will give you a good baseline, as a business rarely sells for less than the owner’s equity amount.
Usually, the results of a balance sheet valuation will observe the ‘lowest value principle’. What is this? This is a method of evaluating material stock for balance sheet purposes. As a simple example, one would avoid book profits that are a result of changes in market prices. So, if a product was bought for R20 and it is now worth R25, then you could expect a profit of R5 per item. But this profit hasn’t yet been made, so the product would show as R20 in the balance sheet.
Fixed assets will also show in the balance sheet. These can include plant and machinery, motor vehicles, office and business equipment, and fixtures and fittings. In the case of an agricultural business,, this would also include livestock and land.
In the case of actual property, you would bear in mind tenants’ contracts, general condition, current usage, rates, expenses, and so on.
Stocks and shares, owners’ drawings and liabilities will help to complete the puzzle.
As you can see, a balance sheet valuation of any business needs to take into account many factors. When you are spending millions of Rands on a concern, you need to know that there aren’t any hidden trip wires that can cost you money down the line.
Our professional team of valuators have a sound grasp of the principles involved, and can uncover any irregularities on a balance sheet. Join our growing ranks of clients, who trust us and value our high standards of service.
For any questions on this or any other valuation service please contact us on 0860 999 440 or visit www.property-partnership.co.za.