Private business valuations
At Lotus Amity, we provide independent private business valuations for owners, advisers and institutions. These valuations support transactions, financial reporting, tax compliance, restructuring and disputes. Accordingly, we analyse how private businesses generate cash flow and how that cash flow translates into value.
Most engagements involve valuing the business as a whole on a controlling basis. Therefore, we focus on future cash flows, the risks attached to those cash flows and the ability of a purchaser to sustain those earnings. In practice, this requires detailed modelling rather than reliance on simplified earnings-based methods.
We undertake valuations in accordance with recognised professional standards, including the International Valuation Standards and APES 225 Valuation Services.
How private businesses create value
Private businesses differ materially from listed entities. In particular, they often depend on owner involvement, operate with limited diversification and rely on concentrated revenue streams. As a result, valuation must reflect how cash flows behave over time rather than relying on a single-period measure. Accordingly, we analyse:
- projected cash flows over a 5 to 10 year period
- reliance on key personnel and management depth
- customer concentration and contract structure
- industry conditions and cyclicality
- operational structure and scalability
In addition, private businesses frequently include discretionary expenditure and non-commercial arrangements. Therefore, reported results often differ from underlying economic performance.
Valuation approach for private businesses
We adopt a discounted cash flow approach in most engagements. This approach captures both the timing and risk of future cash flows and provides a more complete measure of value.
Discounted cash flow modelling
Under a discounted cash flow approach, we project cash flows over a defined period, typically 5 to 10 years, and discount those cash flows to present value. In practice, we:
- develop projections based on operational and financial drivers
- model revenue, margins and cost structure explicitly
- assess working capital and capital expenditure requirements
- incorporate scenario analysis where uncertainty exists
Accordingly, value reflects how the business is expected to perform over time rather than relying on a single earnings figure.
Treatment of risk in valuation
Risk is incorporated through both cash flow modelling and the discount rate. However, different risks are treated differently. We construct the discount rate using established financial inputs, including:
- risk-free rate
- equity risk premium
- beta or total beta
- capital structure
- cost of debt
Accordingly, the discount rate captures systematic market risk and the broader economic environment. However, we do not incorporate company-specific risks into the discount rate. Instead, we address those risks directly within cash flow modelling.
In practice, this includes:
- customer concentration and potential loss scenarios
- reliance on key personnel
- contract terms and revenue visibility
- timing and magnitude of operational changes
For example, where a manufacturing business relies on a major customer, we assess the probability of loss, expected timing and financial impact. We then reflect those outcomes in projected cash flows. Accordingly, the valuation reflects how risk affects actual performance rather than embedding all uncertainty within a single rate.
Revenue and cash flow analysis
Determining value requires forward-looking modelling. However, reported performance often includes distortions. Accordingly, we adjust historical results to establish a reliable base for projections. We assess:
- non-recurring income and expenses
- owner remuneration and commercial salary levels
- discretionary expenditure
- accounting treatments and timing effects
We then incorporate these adjustments into projections. As a result, the valuation reflects expected future performance rather than historical accounting outcomes.
Risk and sustainability
Risk directly affects value. Therefore, we embed risk assessment within both projections and assumptions. In particular, we consider:
- stability of revenue and customer relationships
- dependence on specific clients or contracts
- operational resilience and management depth
- exposure to industry and economic conditions
In addition, we assess whether a purchaser can sustain operations. Consequently, transferability remains central to valuation.
Control versus minority interests
Most valuations are prepared on a controlling basis. This reflects ownership of the entire business and the ability to direct operations and strategy.
However, where minority interests are valued, we assess the limitations of that position. In those cases, we apply adjustments for lack of control and marketability. Accordingly, the valuation basis must align with the purpose of the engagement.
When private business valuations are required
Private business valuations arise in a range of situations. For example:
- business sales and acquisitions
- shareholder disputes
- family law matters
- financial reporting and tax compliance
- restructuring and insolvency
In each case, we tailor modelling and assumptions to the specific context.
Case studies
Engineering consulting business (infrastructure and government projects)
Background: We valued an engineering consulting firm delivering infrastructure and government-funded projects, where revenue depended on utilisation and project cycles.
Approach: We modelled cash flows based on utilisation, backlog and secured pipeline. We then constructed a discount rate reflecting project risk and client concentration.
Outcome: Value depended on forward workload and sustainable utilisation rather than historical profit.
Healthcare services business (multi-site allied health provider)
Background: We valued a healthcare business operating multiple clinics, with revenue driven by practitioner utilisation and patient demand.
Approach: We projected cash flows based on clinic capacity, utilisation and practitioner retention. We incorporated downside scenarios for practitioner turnover.
Outcome: Value proved sensitive to staff retention and service demand.
Management rights and property services business
Background: We assessed value in a dispute involving a management rights business with income from caretaking and letting agreements.
Approach: We modelled cash flows under alternative contractual scenarios and assessed remuneration structure and termination risk.
Outcome: Value varied depending on contractual assumptions.
Technology-enabled consulting business with intellectual property
Background: We valued a consulting business with proprietary systems that generated both service and software-related income.
Approach: We separated and modelled each cash flow stream based on its growth and risk characteristics.
Outcome: Intellectual property contributed disproportionately to total value.
Manufacturing and distribution business (industrial products)
Background: We valued a manufacturing business supplying industrial products to a concentrated customer base.
Approach: We projected cash flows based on production capacity and customer retention. We modelled the impact of losing a major customer.
Outcome: Value proved highly sensitive to customer concentration.
Construction business in restructuring scenario
Background: We valued a construction business experiencing margin pressure due to project overruns.
Approach: We developed multiple scenarios reflecting project outcomes, margin recovery and contract risk.
Outcome: Value varied significantly depending on recovery outcomes.
FAQs
What is a private business valuation? A private business valuation determines the value of a non-listed business based on projected cash flows and risk.
How are private businesses valued? Private businesses are typically valued using discounted cash flow modelling, where future cash flows are projected and discounted.
Why are earnings adjusted? Adjustments remove non-recurring and non-commercial items to ensure projections reflect sustainable performance.
What drives the discount rate? The discount rate reflects systematic market risk using inputs such as the risk-free rate, equity risk premium and beta.
How are company-specific risks treated? Company-specific risks are incorporated into cash flow modelling by assessing probability, timing and impact.
What determines value? Value depends on projected cash flows, risk, growth and the ability to sustain operations.
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