Advisors face ‘notoriously difficult’ challenges in assessing private companies



New analysis found that the riskiest element for advisors when building a client portfolio or retirement plan is the valuation of a client’s private business, according to a planning firm of the next generation.

Recent research conducted by the Australian business succession and exit planning firm Succession Plus has revealed a continuing trend that it is “notoriously difficult” for private companies to be evaluated, as most advisers financiers are not qualified or authorized to do so “through no fault of their own”.

This can be problematic for owners and related SMSF members, with research showing that 90 percent of business owners’ wealth is typically business and related assets.

One of the main findings also noted that few respondents considered financial advisers when it comes to valuing businesses, with accountants and lawyers being more preferred.

Succession Plus CEO Craig West said that proper valuation of a business involves techniques that take into account macroeconomic factors, industry drivers and business risks, and for this reason advisors should engage with a succession planning specialist.

“Basically, valuing a business is determining two key elements, the same elements necessary to value any type of asset: return and risk,” said West.

Areas advisors should be familiar with when evaluating a business include additions (removing personal expenses), comparative sales, identifying a goal for the valuation, non-financial analysis, and profit.

“Creating and increasing the value of a business takes time,” West explained.

“The difference between equity or the long-term value that can be extracted when you quit and income is the time frame.

“Therefore, advise your clients to start early, to know what their business is worth, and to determine what needs to be done to increase value and make the business more attractive when they are ready to realize that value.”

Advisors face ‘notoriously difficult’ challenges in assessing private companies

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Last updated: 07 October 2021

Posted: 07 October 2021

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