Business valuation for bank finance and capital raising
Lenders and investors are testing different things. A bank wants net asset backing and evidence the debt can be serviced; an investor wants earnings quality and a defensible forecast. The same business needs the emphasis in the report set to whichever is reading it.
A valuation prepared for a sale answers a question neither a lender nor an investor asked. Telling us who will rely on the report, and what decision they are making, changes what the engagement examines and how the conclusions are presented.
The brief
Who reads it, and what it has to satisfy
The purpose sets the standard of value, the level of documentation and the person the report has to convince. Getting that wrong is the most common reason a valuation is rejected.
The lender’s credit team, or the incoming investor and their adviser. Both read critically and neither takes management figures at face value.
Fair market value, with an explicit view on asset backing for lenders and on forecast reliability for investors.
Current, with the most recent management accounts and, for investors, a tested forward view.
What the report must contain for this purpose
- The party entitled to rely on the report, named
- Net tangible asset backing, assessed at market rather than book
- Maintainable earnings, with the normalisation schedule itemised
- For lenders, serviceability evidence against the proposed facility
- For investors, the forecast tested against history and industry evidence
- Sensitivities, so the reader sees a range rather than a point
Sequence
How a finance valuation runs
The scoping conversation matters more here than anywhere else, because the audience determines the emphasis.
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01
Establish who is relying on it
A named lender, an incoming investor, or a board. The report is addressed accordingly and the reliance position is stated.
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02
Value the business and the assets
Earnings-based valuation of the business, with property, plant and equipment valued in-house at market to establish the security position.
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03
Test the forward view
Where a facility or an investment depends on a forecast, that forecast is tested against historical performance and industry evidence rather than accepted.
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04
Present with sensitivities
Credit teams and investment committees ask what happens if the key assumptions are wrong. The report answers that before it is asked.
Where it goes wrong
What credit teams and investors reject
These are the findings that stall an application or a raise, and each is avoidable.
What an independent report does for the negotiation
An independent valuation naming the lender or investor as a relying party moves the conversation from management assertion to tested evidence. In practice that shortens credit approval, narrows the diligence list, and gives you a documented position to negotiate terms against.
- Book values presented as security Plant carried at written-down cost tells a lender nothing about what the security is worth. Only inspected market values do.
- Untested forecasts A hockey-stick forecast with no historical support is the first thing an investment committee dismantles. Either it is evidenced or it is presented as an upside case.
- Add-backs a lender will not accept Lenders assess serviceability on cash available to service debt. Aggressive normalisations that are fine in a sale context are discounted by credit teams.
- No sensitivities A single point estimate invites the question of what happens if it is wrong. Presenting the range first is both more credible and faster.
- The wrong report for the audience A sale-oriented valuation handed to a bank emphasises the wrong things. Tell us the audience and the emphasis changes.
What we need
Documents for this engagement
Everything a standard engagement needs, plus the specifics of the facility or the raise being contemplated.
Open the standard checklist →- Financial statements — three years For each entity in the group
- Current-year management accounts Monthly, with commentary on variances
- Forecast or budget With the assumptions behind it, however rough
- Facility or raise details Amount, term, structure and intended use of funds
- Asset register and property details For the security and asset backing assessment
- Existing debt and covenants Rates, terms, security positions and covenant tests
Usually a market valuation of the business supported by an assessment of net tangible asset backing, with the lender named as entitled to rely on the report. Some lenders want the property and plant valued separately as security. Ask your relationship manager what the credit team requires and tell us — scoping it correctly the first time avoids a second report.
Not always. A buyer assessing maintainable earnings and a credit team assessing serviceability are asking different questions. Add-backs for owner remuneration above a genuine replacement cost, or for expenses that will in fact continue, are commonly discounted by lenders. The report presents the normalisation transparently so the reader can apply their own view.
Earnings quality, revenue durability, customer concentration, the credibility of the forecast and the capital structure. A valuation that tests the forecast rather than reproducing it is considerably more persuasive in a raise than one that simply capitalises management’s numbers.
Yes, in-house. Asset Valuations Group values real property, plant and equipment alongside the business, so a lender receives a consistent set of numbers from one firm rather than reconciling reports from three.
It can, and it usually should. A report naming the relying party is what a credit team expects; a general-purpose report addressed to nobody frequently gets sent back. Tell us the lender and the facility at the outset.
Reviewed by a Certified Practising Valuer
Reviewed by Jarrad Khoury, Director and Head of Valuations — Registered Valuer (QLD, Not Limited), Licensed Valuer (WA, Not Limited), CPV and CBV. Published by Business Valuations Brisbane, the business valuation division of Asset Valuations Group.
Last reviewed
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