Gold Magazine September - October 2013, Issue 30 | Página 74

valuation

{business}

WHAT’S IT

WORTH?

IF YOU OWN A BUSINESS, IT IS AN IMPORTANT ASSET, AND IT IS VITAL THAT YOU KNOW ITS VALUE.
BUT HOW EXACTLY DOES A BUSINESS VALUATION WORK?
By Rakis Christoforou

A

lthough business evaluation
is not quite
as simple as
assessing the
value of an
asset such as
shares, where
you can come
up with a
figure simply by multiplying the number
of shares you own by their closing price, a
skilled business appraiser can supply you
with a sound estimate.
Many people try to create their own business valuation by factoring in the company’s
historical financial statements but, to correctly perform a business valuation, many
other factors need to be considered. Finan-

cial statements are created using generally
accepted accounting principles. This means
that amortization, depreciation and other
expenses are recorded based on accounting rules and not on economic realities. A
financial statement is also unable to apply
to the statement any intangible assets that a
company might have, and will thus not accurately reflect the true value of the business.
I believe that credible and defensible
business valuations can only be provided
by Accredited Business Appraisers who correctly follow all the necessary steps in the
process, as described below.

ability and the appraiser must ask lots of
questions.
• The value lies in the future earnings of
the business, so both internal and external
risks and opportunities must be considered.
Financial accounts for most SMEs will
require “normalisation” i.e. identification
of discretionary expenses and reasonable
owner’s remuneration.
• All approaches should be considered and
appropriate methods applied.
• A Sanity Test should be applied to all
valuation conclusions and a range is generally more accurate than a precise figure.

• Full information (operational, financial,
non-financial, economic and industry
analysis etc) underpins sound valuations.
• Curiosity is as important as calculating

That said, there are three fundamental ways
of measuring what a business is worth: The
Asset Approach, The Market Approach and
The Income Approach.

70 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS