• Valuation of a business

    What is a business?

    In this guide, we use 'business' in a way consistent with usual valuation industry descriptions and definitions, applied within the context of Australian federal tax law.

    Business is defined in the International glossary of business valuation terms as meaning 'business enterprise' and is defined as: 'a commercial, industrial, service, or investment entity (or a combination thereof) pursuing an economic activity.'

    Section 995-1 of the ITAA 1997 defines 'business' as including 'any profession, trade, employment, vocation or calling, but does not include an occupation as an employee'.

    We have also provided some guidance in relation to the meaning of 'business'. Refer to Taxation Ruling TR 1999/16External Link: Income tax: Capital gains: goodwill of a business.

    Valuation methods

    The valuation of a business is usually based on a number of established valuation methods built around the market-based, income-based and asset-based approaches.

    These methods include:

    • comparable transactions
    • comparable trading
    • capitalisation of earnings
    • discounted cash flow
    • calculation of net assets on a going-concern basis.

    A significant amount of published material is available regarding these (and other) methods. Accordingly, the mechanics of these methods are not covered in this guide other than to note their application within the context of existing legislation, our publications and established industry approaches (for instance, refer to the appendix, table 3).

    In valuing a business, we would expect to see that you have considered a number of factors that may affect the market value and produced a reasonable and defensible view of the market value.

    These factors may include:

    • valuation methods – you would need to explain your choices and demonstrate why they are appropriate
    • valuation metrics – you would need to explain your choice and demonstrate that you have applied them appropriately; for instance, you would need to show how you derived a company weighted average cost of capital (WACC)
    • valuation date
    • purpose of the valuation
    • basis or premise of your valuation – for example, valuation of the business on a going-concern basis
    • description of the business
    • a summary of the corporate structure and management of the business – including such details as the operating history, management and board, capital structure, company constitution, board minutes, shareholder agreements, business and strategic plans, marketing plans and operating plans
    • market information – including key customers and spread, customer lists, sales pipeline, barriers to entry, competitors, alternative products, market size and growth
    • operations – including information such as manufacturing and production, service delivery, research and development capability/plans, fixed asset details, key suppliers, intellectual property protection and utilisation, resourcing, risk identification and management and regulatory issues
    • products or services – including information such as product description, product pipeline, pricing and the basis of pricing (for example, market or cost-plus)
    • financial requirements and financial structure - including information such as current and historical financial statements, budgets, forecasts, key operating metrics, funding details and terms (equity, hybrid and debt funding – existing and planned), off-balance-sheet structures, capital expenditure requirements and operating cash flows
    • strategic and corporate development initiatives – including information such as previous and planned acquisitions, previous and planned divestments, corporate restructures, corporate actions, strategic alliances and joint ventures
    • sales and marketing strategies – including information such as target markets (existing and planned), direct or channel strategies, reseller or supplier agreements, compensation strategies and product and brand awareness strategies
    • adjustments for items such as non-operating assets (for example, investments) and excess cash
    • adjustments for factors such as control and liquidity or marketability (at the company or business level).
      Last modified: 01 Jul 2015QC 21245