Hire and Rental News - August 2019

INDUSTRY IN FOCUS What is my business worth? During the HIRE19 Business Essentials workshop, Nicholas Guest, Valuations expert and Partner, Corporate Advisory, from HRIA advisory partner, HLB Mann Judd discussed ‘Valuing your business’ and outlined the many reasons why owners need to know what their business is worth. D etermining the value of your business can be a central factor in assisting business owners and managers profitably growing and developing their business, leveraging finance, planning for succession or selling the business, or in a liquidation process. There may also be a need to determine a value when changing the business structure, for example when bringing in new partners or family members. Factors that influence business value include the business profitability, nature and quality of customer relationships, physical location and quality of assets, level of debt, business processes relating to legal and governance, staffing and succession plans, and the industrial relations history of the business. Valuation is complex and subjective and there are a number of different values that can be placed against a business. These include: • fair value or what a buyer will pay; • intrinsic value or the theoretical value the owners place upon the business; • market value or similar to a recent price achieved in a liquid market; • replacement value or the cost to replace all established and assembled business assets; and • liquidation value or the short time frame to realise the value of the assets via sale. Questions to ask Ask yourself the following questions when valuing your business: 1. Why are you preparing the valuation and for whom is the valuation being prepared? This might include management, shareholders, the ATO or even court officials. You also want to ask who will do the valuation and their qualifications and experience. 2. What is being valued? • The whole business? • A single share? • Or 100% of equity? 3. Who owns the current assets and should they be included in the value of the business? 4. Will the current owners of the business continue to be part of the business after the valuation or sale? 5. What is the basis of valuation (going concern vs realisation?) 6. What definition of value to be applied (eg: fair market value vs fair value vs market value vs exit price). 7. What is the type of report and contents to include (valuation vs limited scope vs calculation). 8. Which valuation approach should be applied to the business? • Discounted cash flow (‘DCF’) vs capitalisation of future maintainable earnings (‘FME’) – this is widely used and easy to understand and compare to other comparison valuations) vs asset basis (works with physical assets vs liabilities)? Enterprise Value Calculation Expenses Expense LED Solar SLT LED Diesel SLT Purchase Price $20,000.00 + GST $20,000.00 + GST Service Price (average 8 x per year @$450 + GST per service) Nil $3,600.00 + GST Fuel 3000 hours per year Nil $2,856.00 + GST (tank of diesel using 0.65L per hour in a 120L tank) Overall cost 12 months $20,000.00 + GST $29,456.00 + GST Return of Investment over a 12-month Period with 80% Utilisation Expense LED Solar SLT LED Diesel SLT Hire Rate Per Week $400.00 + GST $420.00 + GST ROI @ 80% utilisation over 12 months $16,640.00 + GST $17,472.00 + GST Return of Investment over a 5-year Period with 80% Utilisation Expense LED Solar SLT LED Diesel SLT Hire Rate Per Week $400.00 + GST $420.00 + GST ROI @ 80% utilisation over 5 yr $83,000.00 + GST $87,360.00 + GST Cost Less Return on Investment over 12-months Example Workings Future Maintainable Earnings (EBIT or EBITDA) $150,000 $ Multiple (eg 3x - 4.5x) 3.2x x Enterprise Value $480,000 x +/- Value of surplus assets and debt ($55,000) (55,000) Equity Value $425,000 Table 1: Future maintainable earnings use profit before tax, depreciation and amortisation. The multiplier is sourced from market data about similar businesses which is subjective and can be an area of contention since it can have a big impact of the overall value of a business. Then multiply the value by the agreed value to get th enterprise value. A simplified valuation approach for the capitalisation approach is: equity value to the shareholders is comprised of enterprise value plus value of surplus assets less value of debt. Factors likely to influence business value revolve around five factors. 1. Financial – lower values will result from incomplete financial information, inadequate reporting systems and a lack of budgeting and forecasts; whereas a higher value will be achieved with quality monthly management reports, supportable forecasts and optimal capital and corporate structure. 2. Business strategy – lower value will result from minimal growth options, no business plan and poor competitive position; while higher value will result from attractive acquisition opportunities, a strong business plan or strategy with key milestones noted. 3. Staffing – lower value will result from reliance on the CEO or managing director, an inexperienced management team and key employees not ‘locked in’ to the business. Higher value will result from succession plans, management incentive plans, employment agreements and restrictive covenants. 4. Business processes – lower value will result from weak supplier relationships, no documented internal processes and poorly maintained plant and equipment. Higher value will result from strong customer and supplier relationships, documented internal processes and IT systems plus well maintained equipment. 5. Legal & Governance – lower value will result from non-transferable legal agreements, outstanding litigation, little to no risk management or corporate governance in place. Higher value will result from sale friendly legal agreements, established risk management and corporate governance policies. Basically, if you have good internal systems you will add to the day-to-day overall value of the business. Improve value Improving value is all about improving cash flow and making it easier for customers to pay and documenting all your relationships across the business. • Let your systems do the work for you and they will help you maintain adequate cash reserves. • Understand your customer concentration. Make your marketing and business development investment go further and develop new customer procedures. • Develop effective processes and procedures, protect yourself and your assets and seek advice when required. • Consider what tasks can be outsourced, identify what tasks can be automated and question where you get leverage. Be future ready Being future ready allows flexibility in the business and in your future planning. Is your business plan up to date and does it align with your business and personal goals? Does that stay true for this year? Or next year? What about in 10 years’ time? Document your ideas for business planning and capture them regularly. Valuation is a performance measure that can be used for years to come. n Contact: Nicholas Guest on 02 9020 4000 or email: nguest@hlbnsw.com.au P14 HIRE AND RENTAL NEWS AUGUST 2019