business valuation client guide -...

Business Valuation Client Guide

Introduction 3

When do you need a business valuation? 4

Family Law property settlements 4

Shareholder disputes 4

Business succession 4

Mergers and acquisitions 4

Financial reporting requirements 4

Taxation requirements 5

What type of business valuation engagement do you need? 6

Calculation engagement 6

Limited scope engagement 7

Valuation engagement 7

Business appraisal 7

How will the business valuation be calculated? 9

Rule of Thumb method 10

Capitalisation of Future Maintainable Earnings method 11

Discounted Cash Flow method 11

Other commonly used valuation methods 12

Net Asset Backing method 12

Dividend Yield 12

Return on Investment 12

Frequently asked questions 13

Enterprise Value v Equity Value 13

What does the valuation conclusion include? 14

Capitalisation Rate 15

Minority Discount 15

Questionnaire 16

What additional information do you need to provide? 19

Individuals 19

Business 19

Company 20

Trust 20

Partnership 20

What other issues should you consider? 21

Capital Gains Tax 21

Main Residence Exemption 22

Stamp Duty 23

Family Law property settlements 23

Division 7A 23

Stock, plant, equipment and property 23

Valuation definitions 24

Disclaimer 26

At your service 27

Contents

Introduction

This Business Valuation Client Guide has been written to help remove some of the mystery of business valuation engagements and can be used as a step-by-step guide to help answer some common questions often raised by clients.

The guide includes information about:

• When to undertake a business valuation?

• What type of business valuation engagement is needed?

• How the valuation of the business will be calculated?

• What the valuation conclusion means?

The guide also addresses common issues that need to be considered post valuation, such as:

• Capital Gains Tax

• Main Residence Exemption

• Stamp Duty

• Family Law property settlements

• Division 7A

Included in the guide is a sample questionnaire that addresses information that needs to be supplied as part of the business valuation process along with a checklist of source documents that will need to be provided.

3Business Valuation Client Guide

When do you need a business valuation?

The first step is to identify when a business valuation is required. There are a variety of reasons for business valuations, some of the key drivers are discussed below.

Family Law property settlements

When couples divorce, they need to undertake a property settlement. If the spouses hold an interest in a privately-owned business, then a value will need to be applied to the business to determine the asset pool. It is not uncommon for the spouses to have different opinions on the value of the business. To determine the fair market value, it is recommended that an independent business valuation be undertaken.

Shareholder disputes

As businesses grow, shareholders have different opinions on what direction to take the business in the future. This, along with financial, competitive and external pressures may lead to one or more of the shareholders deciding to move out of the business. An independent business valuation will ensure that all shareholders have a clear picture of the business and know that they have been paid fair market price for their shareholding.

Business succession

Business owners may be looking to sell down their interest, either through generational succession or an employee buyout. In both cases, an independent business valuation is required to make sure that the business has been transferred at fair market value between the related parties.

Mergers and acquisitions

Business valuations are an essential part of every merger and acquisition transaction.

Financial reporting requirements

Business valuations need to be undertaken as accounting standards continue to require fair value as a relevant measure for financial reporting purposes.

The measure of fair value is used throughout financial reporting with uses including:

4 Business Valuation Client Guide

• Measuring financial instruments at fair value;

• Calculating impairments; and

• Recording assets acquired and liabilities assumed in a business combination.

Taxation requirements

There are several instances when you need to assess the market value of a business, security or intangible asset for tax purposes. In the following circumstances, it will be necessary to complete a business valuation to ensure you have complied with the law:

• Changes in capital structure

• Changes of ownership

• Capital Gains Tax rollovers

• Company divestments

• Company acquisitions

• Formation of a tax-consolidated group

• Entry to a tax-consolidated group

• Exit from a tax-consolidated group

• Thin capitalisation.


What type of business valuation engagement do you need?

One of the most common questions clients have when they are undertaking a valuation is what type of valuation do I need to undertake?

The answer to this question will vary depending on why you are engaging the valuer and if the valuation is going to be used as evidence in court.

The Accounting Professional & Ethical Standards Board has issued APES 225 Valuation Services. This is a professional standard for valuation work and compliance is mandatory for members of professional accounting bodies in Australia. This standard sets out three different types of engagement as follows.

Calculation engagement

This is an engagement where the valuer and the client agree on the valuation approaches, valuation methods and valuation procedures the valuer will employ.

This is the lowest level of valuation; a calculation engagement generally does not include all of the valuation procedures required for a valuation engagement or a limited scope engagement.

When a calculation engagement is undertaken a disclaimer is included noting that if a full valuation engagement had been undertaken the valuation calculation and conclusion may have resulted in a different value.

A calculation engagement is normally undertaken in the following circumstances:

• Where there is a shareholders’ agreement setting out how the business is to be valued

• For micro businesses where a Rule of Thumb is applied to calculate the business value

• When a vendor wants to determine the listing price for the potential sale of their business

• At the early stages of negotiation where the client wants an independent opinion of valuation.


Limited scope engagement

A limited scope engagement is where the scope of work is limited or restricted. The scope of work is limited or restricted where the valuer is not free to employ valuation approaches, valuation methods and valuation procedures that a reasonable and informed third party would perform taking into consideration all the specific facts and circumstances of the engagement. The effect of the limitation or restriction on the estimate of value is material. The limitation or restriction may be known at the outset of the engagement or may arise during the course of the valuation engagement.

When a limited scope engagement is undertaken, a disclaimer is included noting that if a full valuation engagement had been undertaken the valuation calculation and conclusion may have resulted in a different value.

A limited scope engagement is normally undertaken in the following circumstances:

• Where all the information requested by the valuer has not been made available

• When a minority shareholder engages the valuer, and does not have full access to all the business records

• When the spouse of the business owner engages the valuer to value a business for a Family Law property settlement and they do not hold an ownership interest in the business

• Where the financial reports have not been completed by the business accountants for a number of years

• When the financial reports and other information provided to the valuer have errors

• Where the financial reports and other information provided to the valuer do not reflect the actual trading of the business, this may occur in industries where there are large cash payments or for businesses that have dealings with related parties.

Valuation engagement

A valuation engagement is when the valuer is free to employ the valuation approaches, valuation methods and valuation procedures that a reasonable and informed third party would perform taking into consideration all the specific facts and circumstances of the engagement available to the member at that time.

This is the highest level of engagement when preparing a business valuation and is the engagement that needs to be undertaken if there is any chance the valuation will be used as evidence in court.

A valuation engagement is the most common form of valuation that is undertaken, and is the default engagement unless one of the circumstances listed under the calculation engagement or limited scope engagement occur.

Business appraisal

Often when clients are considering purchasing a business they seek the advice of a valuation specialist to determine whether they should go ahead with the acquisition.


Rather than undertaking a valuation engagement, often in this situation it is more appropriate to undertake a business appraisal.

A business appraisal reviews the purchase price as well as summarises the risk profile of the business and industry in which it operates. The appraisal has a much broader focus than a business valuation and provides the purchaser with an overall picture of the business.

Business appraisals address the following areas in detail:

• Summary of the acquisition cost including legal fees, Stamp Duty and initial working capital requirements

• Analysis of the current business operations

• Summary of the businesses’ financial performance, including:

o Business benchmarking

o Major expenses

o Budget projections

o Payback period

o Return on investment

o Break even point

• A breakdown of the assets being acquired, including:

o Plant and equipment

o Stock

o Goodwill.

• Review of competition

• Summary of the financing options

• Recommendation in relation to the acquisition.


How will the business valuation be calculated?

Calculating a fair market value of a business is achieved using one or more commonly accepted valuation techniques. The valuation techniques applied differ depending on the size of the business and the industry in which it operates.

As a general guide businesses are normally valued as follows:

Business Type

Turnover ($m)

Valuation Method Explanation

Micro < 1 Rule of Thumb or Capitalisation of Future Maintainable Earnings (CFME)

• Large number of industry participants

• The sale of these businesses occur frequently

• The sale price is known to the broader public

Small 1 - 10 CFME • Applies to mature, profitable businesses

Medium 10 - 50 Discount Cash Flow (DCF) or CFME

• The business is more likely to prepare reliable forecasts

Large 50 + DCF • Forecasts are readily available

• Shares are liquid and can be publically traded


Rule of Thumb method

The Rule of Thumb method may be used in industry sectors where there are a relatively large number of participants. The sale of these businesses occur on a frequent basis and where the sale price is known to the broader public. In these sectors, current market prices can be established for similar businesses and used to provide a basis for forming a reasonable market opinion. Any features unique to the business under consideration are dealt with separately in the valuation.

Some commonly applied Rules of Thumb are:

Industry Rule of Thumb

Accounting Firm Where fees are less than $1m, cents in the dollar of maintainable revenues

Advertising Agency Multiple of annual revenue

Coin Laundry Multiple of monthly gross revenue

Coffee Shop Multiple of weekly turnover

Collection Agency Multiple of monthly revenue

Dental Practice Multiple of annual revenue

Dry Cleaners Multiple of annual revenue

Financial Planning Firm Multiple of recurring income

Hair Salon Multiple of annual sales

Insurance Broker Multiple of annual income

Landscaping Multiple of annual revenue

News Agency Multiple of average weekly gross profit

Pest Control Multiple of annual revenue

Rent Roll Multiple of gross annual commission income


Capitalisation of Future Maintainable Earnings method

This is the most common method of valuation of businesses and is applied when the business has a history of trading profitably and where there is a reasonable expectation that the value of the business will exceed the underlying value of its net assets.

The Capitalisation of Future Maintainable Earnings method is commonly applied to value mature profitable businesses. To calculate the value of the business using this method first the future maintainable earnings of the business is calculated then an assessment is made of an appropriate capitalisation rate. This gives the Enterprise Value of the business. To calculate the Equity Value of the underlying shares a further assessment has to be made to determine the value of any surplus assets and interest bearing debt.

Discounted Cash Flow method

The Discounted Cash Flow method is considered a superior technical approach to business valuations because it allows for fluctuations in future performance. To utilise this methodology the business must be able to provide reliable long term cash flow forecasts, normally 10 years.

This method focuses on cash rather then profits. The value of the business is calculated using the free cash flows generated by the business over time, plus the terminal value. The terminal value is the value that accrues after the 10 year forecast period and often represents the majority of the value. As the cash flows generated by the business are discounted, this valuation method considers both the timing and risk of the investment.

This method can be used for valuing:

• Start-ups

• High-growth companies

• Limited life

• Turnarounds

• Companies that are in decline or that are recovering


Other commonly used valuation methods

Net Asset Backing method

This method assumes that the value of the business is the sum of the net tangible assets and that the value of those assets as recorded in the financial statements of the company is a reasonable reflection of their current value.

Where a business holds significant amounts of fixed assets the valuation of those assets, under a going concern concept, may be at variance with their realisation value. The Net Asset Backing method ignores goodwill and the value of intellectual property, unless they have been recorded in the financial statements. This method is generally considered to be inappropriate for valuing businesses under a going concern concept.

Dividend Yield

This method applies to minority shareholders who have no real control over the business and are not able to influence the distribution of profit or the key operating decisions of the business. This applies even more to minority shareholders in non-listed business, where

liquidity is limited and the value of the shareholding lies largely with the right to receive dividends.

Minority shareholdings can be valued by capitalising the forecast maintainable dividend stream that applies to the shares. The maintainable level of dividends can be estimated by assessing the expected level of future earnings and the dividend policy of the company. Where a dividend policy is not in place an estimate can be made based on a review of past dividends, assessing the working capital requirements of the business and reviewing the likely level of taxation liabilities in the business.

The appropriate capitalisation yield can be determined by reviewing the dividend yields of comparable companies.

Return on Investment

The Return on Investment model represents a reasonable return that a buyer would expect from the business. The value of the business is calculated by applying a hurdle return rate to the future maintainable earnings of the business.


Frequently asked questions

Enterprise Value v Equity Value

When using Capitalisation of Future Maintainable Earnings to calculate the value of a business, the value that is calculated is the Enterprise Value. Enterprise Value is the value of the business before factoring in the way it is funded.

To calculate the Equity Value of the business, i.e. the underlying value of the shares, the surplus assets and interest bearing debt must first be assessed.

Equity Value = Enterprise Value + Surplus Assets – Interest Bearing Debt

The Enterprise Value can be calculated using either EBIT, EBITDA or EBITA. The multiple chosen is based on the nature of the business and the type of industry in which it operates.

Profit & Loss $m Multiple Enterprise Value $m

Net Surplus Assets & Debt $m

Equity Value

$m

Sales Revenue 500

COGS (300)

Other Expenses (75)

EBITDA 125 8 1,000 (200) 800

Depreciation (25)

EBITA 100 10 1,000 (200) 800

Amortisation (9)

EBIT 91 11 1,000 (200) 800

Interest (10)

PBT 81

Less Tax 30% (24)

PAT 57 14 800


What does the valuation conclusion include?

The Enterprise Value of the business includes the stock and all the plant and equipment necessary to run the business. Stock and equipment are NOT added to the Enterprise Value of the business because everything needed to run the business has already been included in the calculation of value.

Enterprise Value

Stock

Plant & Equipment

Goodwill

The Equity Value of the business includes the above along with the surplus assets and interest bearing debt.

Equity Value

Stock

Plant & Equipment

Goodwill

Surplus Assets

Interest Bearing Debt


Capitalisation Rate

Determining the appropriate Capitalisation Rate to apply to a business is a matter of comparing the specific factors of the business being valued to other companies. The key points that are reviewed when setting the Capitalisation Rate are as follows:

• Comparison of growth rates• Scale• Market position• General attributes of the business• Industry in which the business operates• Stage in the business life cycle• Asset backing• Exposure to risk• Level of gearing• Marketability• Price earnings benchmarks

A high multiple reflects:• Low risk• High growth• Dominate market position• Few competitors• A larger business• Low gearing• High quality assets• Strong barriers to entry• Low reliance on key management

personnel• Unique intellectual property

A low multiple reflects:• High risk

o Reliance on one customero Reliance on one suppliero Exposure to foreign exchange risko Exposure to interest rate risk

• Low growth• Weak market position• High level of competition• High gearing• Inferior quality of assets• Low barriers to entry• High reliance on key management

personnel

Small to medium sized businesses normally have a capitalisation multiple somewhere in the range of one to five. In establishing the earnings multiple, a review is undertaken of publicly listed companies that are comparable to the business being valued. Clearly none of these companies will be the same as the business under review as they are much larger and more diversified. They do however provide some reference point. Whilst not absolute, the differential in Capitalisation Rates between a small to medium business and a publicly listed entity is in the range of 20-40% of the multiple of that of a similar business trading in the public market.

Minority Discount

To determine the value of a Minority Interest, a discount is usually applied, with the amount of the discount varying depending on the circumstances. A Minority Discount is applied when the shareholder holds less then a 50% interest in the company. The discount represents the lack of control and the inability to influence decision making or payment of dividends. A discount in the range of 20-25% is not uncommon.


Questionnaire

As part of the valuation process clients are asked to provide information about their business. The following is an example of the type of information required:

Business Valuation Questionnaire

Business overview

Industry overview

Brief history of the business

Description of the customer base

Background information

Description of the business activities

Summary of the customer base

What percentage of your business does your top 3 to 5 customers account for?

Recent history

Specify any changes that have occurred:

• Trading in new locations

• New customer contracts

Owners remuneration

• Description of the work carried out by the owners

• Number of hours worked by the owners each week

• What would it cost to employ someone to perform the owner’s role?

Business premises

Lease

• Term of existing lease

• Options to extend the lease

Going concern issues

• Are there claims against the business?


• Risk of future litigation

• Expanding or decreasing demand for services

• Potential expansion into new markets

• Competition

Assumptions

Are all the income and expenses in the financial statements recorded at fair market value?

Is any work carried out for related parties at non arms length rates?

Fair value of assets

• Market value of plant & equipment

• Is the written down value of plant & equipment in the financial statements a reasonable estimate of value?

• Are there any assets included in the plant & equipment that are private assets not used in the business?

Has there been full and complete disclosure of the financial operation and position of the business?

Have there been any material changes to the business since the end of the financial year?

Valuation calculation

Consider how any of the following would have an effect on the goodwill of the business

• Business name

• Reputation

• Relationship with the customers

• Customer loyalty

• Website & intangible assets

Nature of the business

Name of your top three competitors, size of their business and customer base

Employees

• Number of employees

• Employee qualifications

Existing contracts with customers


Existing contracts with suppliers

How much of the business relies on the owners?

• What would happen to the business if the owner no longer worked in it?

Size and scope of the market

Potential to grow the business

Potential to expand into new markets

Any challenges the business faces in maintaining its profitability

Liquidity

• Potential market to sell the business

• Any interest in purchasing the business from third parties


What additional information do you need to provide? In addition to completing the questionnaire (as above), the following information will need to be provided:

Individuals

Tax returns for the last three years

Copy of any personal guarantees given in relation to the business

Business

Financial statements for the last three years

Tax returns for the last three years

Copy of the tax reconciliations

Management reports for the year to date

Budget for the current financial year

Budget projection out to 10 years

Aged debtors listing

Aged creditors listing

Lease agreement

Payroll Summary

Accrued leave entitlements

Copy of the bank account reconciliation

Copy of the bank loan statements

Copy of all hire purchase agreements and aging summaries

Depreciation schedule

Stock report

Copy of customer contracts

Copy of supplier contracts

Copy of intellectual property contracts including patents and licences


Company

Constitution

ASIC Current Company Extract

Shareholders agreement

Shareholder or Division 7A loan agreements

ATO income tax account summary for the last 12 months

Copy of minutes from shareholder meetings

Trust

Trust deed

Partnership

Partnership agreement

Copy of minutes from partner meetings


What other issues should you consider? Capital Gains Tax

Capital Gains Tax applies to the transfer of investments which were purchased post September 1985. If the investment has been held for more then 12 months the taxable gain is reduced as follows:

Entity Taxable Gain Reduction

Individual 50% of the gain

Trust 50% of the gain

Partnership 50% of the gain

Company No reduction

Superfund in accumulation phase One third of the gain

Superfund in pension phase 100% of the gain

There are also small business Capital Gains Tax concessions which may apply to further reduce the taxable capital gain, these apply if the aggregated turnover of the business is less then $2 million or the net value of the assets is less then $6 million. The concessions which may apply depending on the circumstances are:

• 15 year exemption

• 50% active asset reduction

• Retirement exemption

• Rollover relief


Main Residence Exemption

It is worth noting that in most circumstances a gain realised on the family home is exempt from taxation.

This should be taken into account when splitting the assets in a property settlement for Family Law. This is best demonstrated with an example.

Example

Mr & Mrs Smith have two assets:

• Family home

o Cost 1/1/2000 $400,000 o Value today $1,000,000

• Investment property

o Cost 1/6/2000 $400,000 o Value today $1,000,000

In the property settlement Mrs Smith receives the family home and Mr Smith receives the investment property.

If both of these properties are sold after the Family Law settlement:

• Mrs Smith would have NO tax liability

• Mr Smith will pay tax on 50% of the profit on sale - paying tax on $300,000


Stamp Duty

Depending on the state and the asset being transferred Stamp Duty may apply to the transaction.

Family Law property settlements

If the assets are transferred to individuals following a court order under the Family Law Act, no Capital Gains Tax will be payable on the transfer. The gain will be subject to the marriage breakdown rollover relief; this means the tax on the gain is deferred until the asset is sold by the individual.

In most states where the asset is being transferred to the spouse under a Family Court Order the transfer of the asset is also exempt from Stamp Duty.

Division 7A

Division 7A was introduced on 4 December 1997 to ensure that private companies would no longer be able to make tax free distributions of profits to

shareholders and their associates in the form of payments or loans. The effect of Division 7A is that loans, payments made and debts forgiven by private companies to their shareholders and associates are treated as unfranked dividends to the extent that there is a distributable surplus in the company.

If assets held by a company are transferred out to shareholders or their associates post valuation this will be treated as a Division 7A loan and may result in an unfranked dividend being included in the taxable income of the shareholder.

Stock, plant & equipment and property

If the business holds significant stock or plant and equipment an independent valuation should be undertaken to determine their value.

An independent valuation should also be undertaken if the business being valued holds either commercial or residential property.


Valuation definitions

Business Enterprise - a commercial, industrial, service or investment entity (or a combination thereof) pursuing an economic activity.

Business Risk - the degree of uncertainty of realising expected future returns of the business resulting from factors other than financial leverage.

Business Valuation - the act or process of determining the value of a business enterprise or ownership interest therein.

Capital Structure - the composition of the invested capital of a business enterprise, and the mix of debt and equity financing.

Capitalisation of Earnings method - a valuation method that forms an opinion on the business value based on the sustainable profits generated by the business relative to the risk return expected. This method is a widely used and accepted methodology in business valuations.

Capitalisation Rate - any divisor used to convert anticipated economic benefits of a single period into value. This may also be referred to as the capitalisation multiple which is the inverse of the capitalisation rate.

Cash Flow - cash that is generated over a period of time by an asset, group of assets, or business enterprise.

Control - the power to direct the management and policies of a business enterprise.

Control Premium - an amount or percentage by which the pro rata value of a controlling interest exceeds the pro rata value of a non-controlling interest in a business enterprise to reflect the power of control.

Cost Approach - a general way of determining a value indication of an individual asset by quantifying the amount of money required to replace the future service capability of that asset.

Cost of Capital - the expected rate of return that the market requires in order to attract funds to a particular investment.

Discounted Cash Flow method - a valuation method whereby the present value of the business is reflected in the future expected net cash flows calculated after applying a discount rate.

Discount for Lack of Control - an amount or percentage deducted from the pro rata share of value of 100% of an equity interest in a business to reflect the absence of some or all of the powers of control.

Discount for Lack of Marketability - an amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability.

Discount for Minority Interest - an amount or percentage deducted from the per share value of a minority interest voting share to reflect the absence of control.

Dividend Yield – a financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows: = Annual Dividends Per Share / Price Per Share.

Earnings Before Interest & Tax (EBIT) – an indicator of a company’s profitability, calculated as revenue minus expenses, excluding tax and interest.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) – an indicator of a company’s financial performance which is calculated in the following EBITDA calculation: EBITDA = Revenue – Expenses (excluding tax, interest, depreciation and amortization).

Economic Life - the period of time over which property may generate economic benefits.

Fair Market Value - the price that would be negotiated in an open market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller dealing at arm’s length within a reasonable time frame.

Going Concern - an ongoing operating business enterprise.

Going Concern Value - the value of a business enterprise that is expected to continue to operate into the future. The intangible elements of Going Concern Value result from factors such as having a trained work force, an operational plant, and the necessary licenses, systems and procedures in place.

Goodwill - that intangible asset arising as a result of name, reputation, customer loyalty, location, products and similar factors not separately identified.

Goodwill Value - the value attributable to goodwill.

Income (Income-Based) Approach - a general way of determining a value indication of a business, business ownership interest, security or intangible asset using one or more methods that convert anticipated economic benefits into a present single amount.

Intangible Assets - non-physical assets that grant rights and privileges and have value for the owner. Examples of intangible assets include goodwill, trademarks, patents, copyrights and securities.

Internal Rate of Return – a discount rate at which the present value of the future cash flows of the investment equals the cost of the investment.

Inventory Turnover – a ratio showing how many times a company’s inventory is sold and replaced over a period. Generally calculated as: Sales / Inventory.


Key Person Discount - an amount or percentage deducted from the value of an ownership interest to reflect the reduction in value resulting from the actual or potential loss of a key person in a business enterprise.

Liquidation Value - the net amount that would be realised if the business is terminated and the assets are sold piecemeal.

Majority Interest - an ownership interest greater than 50% of the voting interest in a business enterprise.

Market (Market-Based) Approach - a general way of determining a value indication of a business, business ownership interest, security, or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities, or intangible assets that have been sold.

Marketability - the ability to quickly convert property to cash at minimal cost.

Minority Interest - an ownership interest less than 50% of the voting interest in a business enterprise.

Net Book Value - with respect to a business enterprise, the difference between total assets (net of depreciation and amortisation) and total liabilities as they appear on the balance sheet. With respect to a specific asset, the capitalised cost less accumulated depreciation or amortisation as it appears on the books of account of the business enterprise.

Net Present Value - the value, at a specified date, of future cash inflows less all cash outflows (including the cost of investment) calculated using an appropriate discount rate.

Normalised Earnings – economic benefits adjusted for nonrecurring, noneconomic, or other unusual items to eliminate anomalies and/or facilitate comparisons.

Price/Earnings Multiple - the price of a share of stock divided by its earnings per share.

Return on Investment - the reasonable return level that an investor would expect from a business.

Recurring Revenue – the portion of a company’s revenue that is highly likely to continue in the future. This is revenue that is predictable, stable and can be counted on in the future with a high degree of certainty.

Required Rate of Return – the minimum rate of return acceptable by investors before they will commit money to an investment at a given level of risk.

Risk Free Rate - the rate of return available in the market on an investment free of default risk.

Risk Premium – a rate of return added to a risk-free rate to reflect risk.

Rule of Thumb - a mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay, or a combination of these; usually industry specific.

Standard of Value – the identification of the type of value being used in a specific engagement; e.g. fair market value, fair value, investment value.

Surplus Assets - assets that a business holds, but which are not necessary for the operation of the business, i.e. they are not contributing to the core income-generating activities of the business.

Valuation Date - the specific point in time as of which the valuer’s opinion of value applies.


Disclaimer

The information provided in this booklet has been compiled for your convenience to be used as a client guide when discussing business valuations. The information provided is purely factual in nature and does not take account of your personal objectives, situation or needs. Lambourne Partners does not accept any liability:

(a) for any investment decisions made on the basis of this information. This booklet does not constitute financial advice or taxation advice and should not be taken as such. Lambourne Partners urges you to obtain professional advice before proceeding with any investment.

(b) for any damages or losses whatsoever, arising out of, or in any way related to, the use of this booklet.


Level 1, 56 Hudson Street HAMILTON P: (02) 4969 6600

Level 25, Aurora Place, 88 Phillip Street SYDNEY P: (02) 8313 7071

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