Steps to Conduct Business and Asset Valuation

Introduction

Valuing your business and assets is a crucial exercise for Zimbabwean entrepreneurs seeking investment, planning an exit, securing financing, or simply understanding the economic worth of their enterprise. A rigorous valuation process builds credibility with investors and lenders, informs strategic decisions, and ensures compliance with regulatory requirements such as IFRS for SMEs.

In this 2,000-word guide, we walk you through the nine key steps to conduct a comprehensive business and asset valuation, tailored to Zimbabwe’s unique economic environment. Along the way, we highlight local considerations—currency volatility, inflation adjustments, and regulatory frameworks—and point you to external resources to support each phase.

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Why Value Your Business and Assets?

Before diving into the process, it’s important to understand why valuation matters:

1. Fundraising & Financing: Investors and banks require credible valuations when evaluating equity or debt proposals.
2. Mergers & Acquisitions: Sale, merger, or acquisition negotiations hinge on an agreed-upon enterprise value.
3. Legal & Tax Compliance: Tax authorities (e.g., ZIMRA’s eFiling portal) and statutory reporting under IFRS for SMEs mandate fair-value disclosures.
4. Strategic Planning: Valuations underpin decisions on expansion, asset purchases, or divestitures.
5. Exit Planning & Succession: Founders and family businesses use valuations to structure buy-outs and inheritance.

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Step 1: Define the Valuation Purpose & Scope

Every valuation starts by clarifying:

• Objective: Are you valuing for fundraising, sale, loan security, or statutory reporting? Each purpose may dictate different methods or assumptions.
• Ownership Interest: Full equity, minority stake, or specific business line?
• Control & Marketability Adjustments: Discounts for lack of control or marketability may apply for private SMEs.
• Effective Date: Choose a valuation date (e.g., 31 December 2024). In volatile markets, a recent date minimizes forecasting errors.

Tip: Document these parameters in a Valuation Engagement Letter to set clear expectations with stakeholders.

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Step 2: Gather & Verify Financial Data

Reliable financials form the backbone of any valuation:

1. Historical Financial Statements: At least three to five years of audited or reviewed accounts, prepared under IFRS for SMEs cite IFRS for SMEs adoption in Zimbabwe (2011).
2. Interim Reports: Most recent management accounts and cash-flow statements.
3. Budget & Forecast Models: Detailed projections for revenues, costs, capital expenditures, and working capital.
4. Asset Registers: Lists of fixed assets (date of acquisition, cost, accumulated depreciation) and intangible assets (patents, trademarks).
5. Liabilities & Off-Balance-Sheet Items: Loans, guarantees, leases, and contingent liabilities.
6. Corporate Documents: Incorporation certificates, shareholder agreements, and details of related-party transactions.

Local Resource: Use ZIMRA’s eFiling portal for tax-clearance certificates (ITF263) to verify reported tax liabilities.

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Step 3: Adjust Financial Statements

Financial statements often require adjustments to reflect economic reality:

• Normalize Earnings: Remove non-recurring items (extraordinary gains/losses, owner’s personal expenses charged to the company).
• Hyperinflation Accounting: If applicable, restate historical figures to current purchasing power under IAS 29 (hyperinflation accounting).
• Revalue Assets: For long-held property or equipment, consider fair-market revaluation—especially relevant if inflation has greatly altered replacement costs.
• Working Capital Normalization: Establish a normal working-capital level based on historical averages.
• Tax Adjustment: Use effective corporate tax rate rather than statutory rate to project after-tax cash flows.

These adjustments ensure the valuation models aren’t distorted by accounting anomalies.

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Step 4: Select Appropriate Valuation Approaches

Three primary approaches guide business and asset valuation:

1. Asset-Based Approach
   • Book Value Method: Adjust net asset value from the balance sheet to fair market values.
   • Liquidation Value Method: Estimate proceeds if assets were sold under distressed conditions.
   • Best For: Capital-intensive businesses or asset-holding companies (e.g., real estate, agriculture).
2. Income Approach
   • Discounted Cash Flow (DCF): Forecast free-cash flows and discount them using the Weighted Average Cost of Capital (WACC).
   • Capitalization of Earnings: Apply a capitalization rate to normalized earnings for stable cash-flow businesses.
   • Best For: Established SMEs with reliable cash-flow projections (manufacturing, services).
3. Market Approach
   • Comparable Company Analysis: Use trading multiples (P/E, EV/EBITDA) from listed peers on the Zimbabwe Stock Exchange (ZSE) or regional markets.
   • Precedent Transactions: Benchmark multiples from recent SME sales or M&A deals.
   • Best For: Businesses in sectors with transparent market data (retail, fast-moving consumer goods).

Note: For a robust valuation, apply multiple approaches and reconcile results into a weighted average.

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Step 5: Calculate Cost of Capital & Discount Rates

The cost of capital determines the present value of future cash flows:

• Cost of Equity (Rₑ): Estimate via the Capital Asset Pricing Model (CAPM):

Re=Rf+β(Rm−Rf)R_e = R_f + \beta (R_m – R_f)Re​=Rf​+β(Rm​−Rf​)

• RfR_fRf​: Risk-free rate (e.g., Zimbabwe government bond yield).
• β\betaβ: Business risk relative to market (use regional proxies if unavailable).
• RmR_mRm​: Expected market return.
• Cost of Debt (Rₙ): After-tax yield on SME borrowing rates (e.g., IDCZ term loans). Interest expense is tax-deductible under Zimbabwe tax law, reducing the effective cost.
• WACC:

WACC=ED+ERe+DD+ERd(1−T)\text{WACC} = \frac{E}{D+E} R_e + \frac{D}{D+E} R_d (1 – T)WACC=D+EE​Re​+D+ED​Rd​(1−T)

Where EEE and DDD are market values of equity and debt; TTT = corporate tax rate (25%).

Zimbabwe’s high inflation and credit spreads may push WACC above 20% for risky SMEs; adjust assumptions accordingly.

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Step 6: Apply Valuation Models

6.1 Asset-Based Valuation

1. Revalue Fixed Assets: Commission local quantity surveyor or valuer to update land, buildings, and equipment worth.
2. Subtract Liabilities: Include interest-bearing debt, leases, and contingent obligations.
3. Calculate Net Asset Value (NAV):

NAV=Fair-value Assets−Fair-value Liabilities\text{NAV} = \text{Fair-value Assets} – \text{Fair-value Liabilities}NAV=Fair-value Assets−Fair-value Liabilities

6.2 DCF Model

1. Project Cash Flows: 5-year forecast of operating cash flows, then a terminal value using Gordon Growth:

TV=FCF5×(1+g)(WACC−g)\text{TV} = \frac{\text{FCF}_5 \times (1 + g)}{(WACC – g)}TV=(WACC−g)FCF5​×(1+g)​

Where ggg = long-term growth rate (e.g., 3–5%).

2. Discount to Present Value:

PV=∑t=15FCFt(1+WACC)t+TV(1+WACC)5\text{PV} = \sum_{t=1}^5 \frac{\text{FCF}_t}{(1+WACC)^t} + \frac{\text{TV}}{(1+WACC)^5}PV=t=1∑5​(1+WACC)tFCFt​​+(1+WACC)5TV​

6.3 Market Multiples

1. Select Comparables: Identify 3–5 listed or recently sold Zimbabwean or SADC companies in the same industry.
2. Calculate Multiples: EV/EBITDA, P/E, EV/Sales.
3. Apply to SME Metrics:

Value=SME’s EBITDA×Median EV/EBITDA Multiple\text{Value} = \text{SME’s EBITDA} \times \text{Median EV/EBITDA Multiple}Value=SME’s EBITDA×Median EV/EBITDA Multiple

Where local data is sparse, supplement with South African or regional benchmarks, adjusting for size and country risk.

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Step 7: Reconcile & Weight Results

No single method is foolproof; reconcile divergent values:

Approach	Value (USD)	Weight (%)	Weighted Value
Asset-Based	250,000	20%	50,000
Income (DCF)	400,000	50%	200,000
Market Multiples	350,000	30%	105,000
Final Enterprise Value			355,000

Weights reflect relevance to business nature and data reliability.

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Step 8: Prepare the Valuation Report

A professional valuation report should include:

1. Executive Summary: Purpose, scope, and final value.
2. Business Overview: Industry, products, competitive landscape.
3. Economic Context: Zimbabwe macro trends (inflation, forex, regulatory environment).
4. Data & Assumptions: Financial adjustments, WACC calculation details.
5. Methodologies Applied: Step-by-step for each approach.
6. Valuation Results & Reconciliation: Tabular summary and justification of weights.
7. Limitations & Risks: Key sensitivities (e.g., WACC ±2% impact).
8. Appendices: Detailed financial models, comparable company data, asset valuation certificates.

Professional Tip: Engage a qualified business valuer registered with the Institute of Chartered Accountants of Zimbabwe (ICAZ) or a firm with SME valuation expertise.

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Step 9: Use & Update Your Valuation

Once completed, a valuation becomes a living document:

• Fundraising: Present to investors, banks, or DFIs (e.g., IDCZ).
• Strategic Decisions: M&A, joint ventures, or minority stake sales.
• Internal Benchmarking: Set performance targets relative to enterprise value.
• Periodic Review: Update annually or when significant business events occur (new product launch, major capital expenditure, or macroeconomic shifts).

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Local Considerations & External Resources

Inflation & Currency Volatility

Adjust cash flows and discount rates to reflect Zimbabwe’s current inflation rate (e.g., 20–50%) and consider multi-currency scenarios for exporters.

Regulatory Framework

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Case Study: Valuing a Harare-Based Agro-Processor

Background:
GreenGrains Ltd., a medium-sized agro-processor in Harare, sought financing to expand its milling capacity.

Process:

1. Objective: Raise USD 500,000 from IDCZ.
2. Data Gathering: Five years of IFRS for SMEs financials, detailed CAPEX plan.
3. Adjustments: Normalize owner’s salary and restate 2019 hyperinflationary figures under IAS 29.
4. Approaches Applied:
   • Asset-based: USD 300,000
   • DCF (10% WACC): USD 550,000
   • Market multiples (EV/EBITDA 5×): USD 520,000
5. Reconciliation: Weighted final value at USD 510,000.
6. Outcome: IDCZ approved a USD 500,000 loan at 10% p.a., secured by a modest 10% equity stake and first-charge on new equipment.

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Best Practices for Zimbabwean Entrepreneurs

1. Engage Experts Early: Valuation is as much art as science—partner with seasoned accountants or valuation specialists.
2. Maintain Clean Records: Accurate, IFRS-compliant financials streamline valuation adjustments and build trust.
3. Document Assumptions: Transparency in methodology strengthens credibility with stakeholders.
4. Scenario-Plan: Run optimistic, base-case, and pessimistic valuations to understand value sensitivities.
5. Update Regularly: Annual or event-driven updates keep your valuation relevant for strategic decisions.

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Conclusion

Conducting a rigorous business and asset valuation empowers Zimbabwean entrepreneurs to make informed strategic choices, secure financing, and negotiate from a position of strength. By following these nine steps—from defining objectives and gathering quality data to applying multiple valuation approaches and reconciling results—you can arrive at a defensible valuation that withstands investor scrutiny and supports your growth ambitions.

Leverage local industry benchmarks, comply with regulatory standards (IFRS for SMEs, ZIMRA), and consult qualified professionals to ensure your valuation is both accurate and actionable. With a solid valuation foundation, you’ll be well-equipped to unlock the next phase of your entrepreneurial journey.