Businesses in Darwin across all industries depend on business valuations. These are complex, analytical investigations aimed at determining an enterprise’s fair market value. Licensed business valuers in Darwin provide information crucial for decision-making to investors, buyers, sellers and various key stakeholders. Often, market value is at the core of business valuation.
What is Fair Market Value?
Fair market value refers to the price at which a business would change hands between a willing and fully knowledgeable buyer and a seller. This is significant across the entire business landscape.
Establishing this market value means accounting for numerous factors of a company’s operations and performance. The process is guided by a range of official standards, guidelines and regulations.
That said, who determines fair market value in a business valuation?
When it comes to the valuation service itself, market value is determined by licensed, independent business valuers. Market value is also affected by regulatory bodies such as the Australian Securities and Investments Commission (ASIC), economic and market conditions and the court system.
In other words, there is no single, official body in charge of determining fair market value. Instead, valuers employ a combination of accounting, financial analysis and business expertise. These are combined with a series of industry-vetted methodologies designed to ensure accuracy, transparency and compliance in business valuations.
How are business valuers trained?
To qualify as a business valuer in the Northern Territory, individuals undergo a rigorous training process. This serves to build the foundational knowledge needed to determine the fair market value of businesses in various industries accurately.
This process combines theoretical knowledge with practical experience. For starters, valuers will pursue qualifications in fields such as finance, accounting and economics.
This imbues a basic understanding of:
- financial principles
- business operations
- valuation methodologies.
The next step is generally to obtain professional certifications or accreditations. The most recognised accreditation in Australia for business valuers is Chartered Practising Accountants (CPA). Potential valuers will need to meet pass exams and meet various education and experience requirements in order to obtain CPV status.
That practical experience is particularly important. Valuers must gain hands-on experience by working under the guidance of experienced professionals or through internships at valuation firms. This serves to develop analytical skills, as well as help learn industry-specific nuances and how to apply valuation methods.
Finally, once qualified and employed, valuers will receive continuous professional development. This is to ensure that CPVs remain abreast of industry trends, changes in regulations and emerging valuation practices. This is generally done through various workshops, seminars and conferences.
What is fair market value of a business based on?
All of this training exists to prepare valuers for the complexity of business valuation. To ensure accuracy, valuers must consider a wide range of factors concerning the business itself, the economy and the purpose of the valuation.
An organisation’s financial performance is paramount. Valuers look at factors like:
- historical and projected revenue
- profitability
- cash flow
- earning potential.
This requires reviewing financial statements, tax returns, and other relevant financial data.
Next up, a valuer will examine market conditions and industry trends. These include the current state of the industry, growth prospects, competitive landscape and demand for the business's products or services. Sales of similar businesses may be used as benchmarks too.
The assets and liabilities of the business are also evaluated. This step is made up of analysing tangible assets such as real estate, equipment and inventory, as well as intangible assets like intellectual property, customer relationships and brand value.
Valuers will also need to assess the strength of the management team, the organisation’s reputation and goodwill, market positioning and potential risks or contingencies.
Finally, market value is determined by the valuation methodologies used. Methods include the income approach, market approach and asset-based approach. These methods consider different factors and emphasise different aspects of the business to arrive at a fair value.
The role of market comparison
Of the valuation methods mentioned above, the market approach is one of the most impactful. This involves comparing the subject company with similar businesses in the market. It supports the valuer in determining fair market value by considering industry trends, market conditions, comparable sales data and more.
When making comparisons, valuers look at the likes of:
- financial performance
- risk profiles
- growth prospects.
This is a crucial step in the dynamic Australian business ecosystem. Every industry has its unique characteristics and market dynamics. Comparing similar businesses within the same sector helps a valuer account for these kinds of industry-specific factors.
It also provides key benchmarks for assessing the subject company's relative performance and competitive position in the market. This serves to identify strengths and weaknesses, pinpoint areas for improvement and facilitate decision-making.
The relevance of the data can vary from case to case. Factors such as size, geographic location, specific operational characteristics, market conditions and economic fluctuations must be considered for their potential impacts.
Summary
In Darwin, the most qualified professionals for determining the true market value of a company are certified business valuers. These are trained professionals with the requisite experience, knowledge, qualifications and licensing to review a company accurately and objectively.
This is done by analysing factors such as market and economic conditions, financial and operational performance, management structure and more.
The value of all tangible and intangible assets must be determined as well. Market comparison is one of the key elements at play here. Valuers will conduct extensive research to identify suitably similar businesses in order to compare their sales prices and establish a series of important benchmarks for the valuation.
If you have any questions on how this is done, call one of our licensed valuers today.