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Only after an accurate fair market value is determined can a business’s worth be established.

Note:- The following information is an abbreviated guide of how a business valuation study might be performed. For a more in-depth guide please click on the following link SME Business Valuation Study

Benefits of having and accurate valuation of a business for Key Person Insurance.
Some of the typical factors to consider when valuing a business

general operations of the business

comparing the business to other similar businesses

what is the business’s economic outlook?

what is the business’s earning capacity?

what is the ‘book value’ of the stock?

goodwill and other intangible values

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Benefits of having and accurate valuation of a business for Key Person Insurance

Most business owners and/or stakeholders have no idea what their business is actually worth; did you know -

many business owners over or undervalue their business by up to least 50%;

a properly completed business valuation can establish the fair market value of the business for a range of purposes including for insurance purposes;

an accurate business valuation is a crucial in determining an individual owner’s net worth which is essential for Key Person Insurance cover planning however;

Some of the typical factors to consider when valuing a business are;

general operations of the business

the business’s earnings and income history;
how long has the business been in operation;
what is the growth rate of the business over the past several years;
what are the business’s total assets;
what are the liabilities of the business;
what type of products and services does the business offer.

comparing the business to other similar businesses
- how does the business perform compared to its competitors;
- when comparing companies, they must be similar in nature;
- when using the comparison approach, the price-earnings, price-book value and price dividend ratios of each business should all be identified;
what is the business’s economic outlook?
- what are the economic trends of the industry;
- what are the business’s strengths and weaknesses;
what is the business’s earning capacity?

It is generally accepted that a business’s earning capacity is its average earnings over a five-year period multiplied by a capitalisation rate; however,
- Capitalisation rates vary from industry to industry and change with changing economic conditions.
- Capitalisation rates are usually based on price earnings ratios of similar publicly traded companies if applicable to the size, scope and complexity of the business’s operations.
what is the ‘book value’ of the stock?
- Book value is generally stated in the business’s assets & liabilities accounts and is an ongoing calculation that fluctuates at different times of the year.
- Book value is based on actual equity in the stock thus, it should only form part of a business’s value along with such components as ‘goodwill’
- Another problem with the book value approach is that accounting records may not accurately reflect the true value of the assets of the business.
goodwill and other intangible values

Essentially, goodwill is not only based on the earnings capacity of a business but, also the business’s hard earned reputation – repeat clientele etc’.

Goodwill is a very arguable thing because, for more than any other reason the underlying value of a business is in the eye of the beholder/buyer and the goodwill will often be the amount they are willing to pay for the business above and beyong it’s core net asset value; taking into consideration –
- how long the business has been established;
- past history, successes and innovations;
- future projects;
- staff and management loyalty;
- industry outlook. etc’.
Calculating goodwill usually starts from the calculation from the excess of net earnings above a reasonable return on the net tangible assets of a business.
The Best approach for valuing a business

The best approach to valuing a business should be identified by a qualified accountant experienced in the valuations of your type of business, a competent tax advisor or experienced and licensed (where necessary) business appraiser.

The point of emphasis is that a proper business valuation is crucial to planning for both business succession as well as the estate planning of the company’s owners – which are matters which can be covered under a Key Person insurance policy.

Only after an accurate fair market value for the business is determined can the needs of a business, its owners, partners and stakeholders equity and other interests can be identified.

Disclaimer

RGIB’ is not a licensed or authorised Valuer. We can not provide valuation services however, as a licensed and authorised insurance brokerage we can provide general information about what type of information underwriters are looking for in relation to a business’s valuation when considering a proposal for ‘Key Person’ insurance. You should not rely on any information herein concerning valuation of a business. You should regard the information herein as general information only. In every case, a licensed and authorised Valuer should be engaged to carryout any business valuation.

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