Frequently Asked Questions around Business Valuations.
What, when and how?
When do I need a business valuation?
A business valuation may be required for several reasons, including:
- Addressing the Companies Act (Sections 114 and 115) requirement for fair and reasonable opinions.
- IFRS 3 Business Combinations and other financial reporting valuation requirements that require a Purchase Price Allocation.
- SARB, Legal and Statutory Valuations required for negotiating dispute settlements.
In general, it’s worthwhile considering a valuation whenever you need an objective opinion about the value of a business. If you are thinking of buying or selling a business, for example, or in a partnership and there are buy-sell issues between owners. You may also consider a valuation to establish a baseline value as part of an exit plan or for value enhancement, allowing you to monitor performance with periodic valuation updates.
What is the difference between a business evaluation and a business appraisal?
There is no difference between the two – the terms are used interchangeably.
Does Alpha perform valuations for companies outside of South Africa?
Yes, Alpha has the capability and resources to perform valuations within the SADC region and globally.
When do I need a fair and reasonable opinion, and who can provide it?
A fair and reasonable opinion is required by Companies Act when a company acquires more than 5% of the Company’s ordinary shares in issue subject to the requirements of section 114 and 115 of the Act. A fair and reasonable assessment may only be prepared by an independent expert valuator and cannot be performed by an entity’s existing auditors.
Should I get a valuation before selling my business?
Selling a business is very different from selling any other tangible asset where comparable sales information is sufficient to support a value (like a house, for instance). As such, more than half of an operating business’s value is likely to be based on intangible assets, including intellectual property, goodwill, licences and location. Based on experience, we would highly recommend a business valuation being performed before you sell your business, as this may be used as an essential negotiating tool in the negotiating process with a potential buyer.
Is there more than just a single value for a business?
Yes, several valuations may be derived, depending on the valuation methodology applied. We provide a valuation range based on the values derived from our methodologies, excluding any outliers.
If a minority shareholder is looking to exit, can you value their share of the business?
Yes, to value the minority shareholding, we would value 100% of the business’s equity value and then determine the proportionate shareholding of the minority shareholder after minority discounts have been applied.
My business partner wants to buy me out. Can you value my interest of ownership?
Yes. If you have a buy-sell or shareholder agreement in place, this will help us by showing how ownership interests in the company are valued and transferred. If you don’t have a shareholder agreement, we will still be able to value the fractional interests, as long as the partners agree on the standard of value.
Costs and Timings
How long does a valuation take?
From the time we receive your information, we generally take about three weeks to deliver a draft business valuation report. This estimation may vary, depending on factors such as the complexity of your business and the accuracy and availability of information.
How much does a valuation cost?
Costs vary, depending on your situation’s complexity, the amount of documentation you need, and the extent of any relevant investigations.
By reviewing your information at our initial consultation, we can provide you with an estimated cost on request. You will not be charged for this review, should you not continue with our services.
What are the main cost drivers for a valuation?
Because the cost of a valuation depends on the time and expenses involved, a complete business valuation costs more than other types of valuation reports since it takes more time. In many cases, a calculation of value is sufficient, and we can prepare that at a lower cost than a complete valuation. After we’ve discussed your needs, we can make a recommendation.
Why are minority interests discounted in a valuation?
Because the majority interest is a controlling interest, it has more value than minority interest. The majority owner has the power to direct investments, strategy, operations, cash distributions, compensation and policy. As such, investors or buyers will naturally pay more for the benefits of owning a controlling interest.
How are marketability discounts applied to private company valuations?
Private company stock is not liquid like public company securities that can be converted to cash within a few days. Combined with the relative difficulty that comes with selling part of a closely-held business, this lack of liquidity affects its value. The Discount for Lack of Marketability (DLOM) depends on the facts and circumstances around the shares being valued.
Confidentiality
Are confidentiality and complete discretion guaranteed?
Yes. At Alpha, we treat all information received from clients with complete confidentiality at all times. The signing of pre-engagement non-disclosure agreements is also a standard part of our practice.