• Valuing the equipment as if it’s new, or close to new, when it isn’t – they may be adding up what they paid for it when it was;
• Trying to factor in their hard work, or what they perceive the business ‘owes’ them;
• Adding ‘potential’ (that may never be realised) into their figures, or including a value for goodwill when none has been well established;
• Equating what the business has cost them with what it’s actually worth;

1. Profit & Loss statement for the past three years
2. 'Interim' Profit & Loss Statement for the current financial year to date
3. Balance Sheets for the past three years
4. Tax returns for the past three years
5. Stock Listing (showing age and value of stock)
6. Deprecation schedule showing plant & equipment included in the sale
7. Employment contracts for all staff
8. Contracts with suppliers
9. Lease agreements (for business premises and any equipment under lease)
10. Customer list

• Most accountants undertake business valuations and while your accountant may be more trustworthy than Mother Theresa, your prospective buyers may see the accountant as being on your ‘side’.

• The broker who is selling your business stands to gain a commission upon sale; and again, while your broker might be entirely accurate with his or her valuation, prospective buyers might suspect it’s a bit like asking a real estate agent if the house they’re selling is well priced.

• Independent business valuers who only undertake valuations don’t just do business valuations occasionally, so many are likely to have significant experience in valuing a variety of business types.

• If you’re selling a business, having a valuation report on hand from an independent valuer can be a real plus. Prospective buyers like to see things on paper! Many approach a business for sale for the first time with great suspicion, so providing an independent business valuation up front can let them know that your approach to valuing the business has been professional and matter of fact.

• If you’re buying a business, an independent business valuation is an inexpensive way of undertaking your due diligence – in other words, doing what you can to make sure you aren’t buying a lemon.

• Of course, sometimes a lemon has potential – and might be an opportunity in disguise if it’s not over priced. But as a buyer, you don’t want to pay for that potential because it’s your money that needs to be used to realise that potential! If you are buying a bit of a lemon, then a business valuation may help you negotiate an unrealistic price down to one that is more in line with the true value of the business.

A Balance Sheet shows the Assets and Liabilities of a company or entity.  It details the company’s financial position at a certain point of time.  The three main parts of a balance sheet are:

1 - Assets – are items of worth to a company, either cash or things that can be converted into cash. Examples of Assets are – Cash, Trade Debtors (also know as Accounts Receivable), Property, Stock, and Plant & Equipment.

2- Liabilities – are debts that a company has. Examples of Liabilities are – Loans, Trade Creditors (also known as Accounts Payable), Provisions & Accruals for future expenses.

3 - Equity – is simply Assets minus Liabilities.  It represents the value of the owners interest in the business.

Assets minus Liabilities must always equal equity, otherwise the Balance Sheet does not balance!

ASSETS – LIABILITIES = EQUITY

Other terms you may see on a Balance Sheet include:

• Current Assets – are assets that are expected to be converted into cash within 12 months
• Non-Current Assets – all other assets which are not ‘current’
• Current Liabilities – liabilities which are due to be paid within the next 12 months
• Non-Current Liabilities – all other liabilities which are not ‘current’
• Current Earnings – Profits for the most recent period (normally the last 12 months)
• Retained Earnings – The sum of profits for all years since the company has started, not including Current Earnings
• Share Capital – the face value of all shares issued in the company.

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A Profit & Loss Statement (or P&L) shows the profit (or loss) of a company or entity over a certain period, normally 1 year. The five components of a Profit & Loss Statement are:

1 - Revenue – Income that has been earned. For example – In a hamburger shop this would be gross sales of hamburgers & drinks.

2 - Cost of Goods Sold  - Referred to as (COGS). Are expenses which are directly related to revenue generated and moves up or down when revenue moves up or down.  For example – a hamburger shop’s COGS are bread rolls, meat, lettuce, tomato, etc. If a hamburger shop’s sales increase, then it is expected that these COGS would also increase as they need to make more hamburgers. 

3 - Gross Profit – is Revenue minus COGS, it shows the profit of the business before deducting overhead expenses.

4 - Expenses – Are the other costs (apart from COGS) that are incurred in running the business. For the hamburger shop these may include – wages for employees, rent of the premises, insurance, and advertising.

5 - Net Profit (or Loss) – Is Gross Profit minus Expenses.  If Gross Profit is greater than Expenses the company is making a profit.  If Expenses are higher than Gross Profit the company is making a loss. 

REVENUE – COGS = GROSS PROFIT

GROSS PROFIT – EXPENSES = NET PROFIT (or LOSS)

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• It’s harder for prospective purchasers to make ridiculous time wasting offers by trying to de-value your business when the value of your business is there in black and white.

• Mentioning in advertisements that the business has been independently valued and the valuation report is available, may attract more potential buyers to view your business as it offers some reassurance that the business is realistically priced.

• A professional and independent business valuation can be reassuring for prospective buyers who are suspicious or concerned about being duped by inaccurate documentation.

• When would-be buyers linger over making a final decision, it’s often because even though they like a business, they’re not entirely convinced it’s worth the asking price. An independent valuation report might help avert indecision and cold feet and result in closing the deal a little faster.

• Profit – if you aren’t making one, you really only have assets to sell; an exception might be if the business is young, turnover is increasing, and/or some existing expenses won’t be ongoing.
• Expenses – unusually high overheads may affect business value.
• Assets – these will be valued at current value, rather than as new.
• Reliance on owner operator – naturally, a business that only makes money if the owner does much of the work themselves, won’t value as well as one that gives good returns without substantial labour provided by the owner.
• Risk – there are risks common to virtually all business types, and then there are risks associated with particular types of ventures.