What Information Is Needed for a Business Valuation?

Why the request looks the way it does

A valuation is an opinion supported by evidence, and almost all of that evidence comes from the business. The information request is the list of documents that lets a valuer establish what the business earns, who earns it, on what terms, and how much of it would continue under a different owner.

Two decisions shape the request before it is sent. The first is the purpose: a shareholder buy-out, a tax restructure, a family law matter and a sale each carry a different standard of proof. The second is the valuation date, the specific date at which value is assessed. Australian Taxation Office guidance on market valuation for tax purposes states that a valuation should rest on the most relevant and reliable information known, or reasonably foreseeable, at the valuation date. The date fixes what may be used; the purpose fixes how firmly it must be supported.

That guidance also explains why source documents are requested rather than summaries: the ATO expects a report to record the information relied on, including its source and the extent of the investigation, and to rest on records detailed enough to let the valuation be replicated.

The method matters too. Capitalisation of future maintainable earnings, which applies a multiple to a sustainable level of profit, rests on the historical accounts and the material behind the normalisation adjustments. A discounted cash flow, which projects future cash flows and discounts them to a present value, rests on forecasts. A net asset approach rests on asset registers, stock and independent asset valuations. Market evidence, meaning evidence of what comparable businesses or interests have actually sold for, rests on transaction data. See healthcare business valuation methods.

The checklist at a glance

• Financial statements and income tax returns, three to five completed years.
• Management accounts, general ledger, aged listings, activity statements and payroll reporting.
• Budgets, forecasts, any earlier valuation and any prior share or unit transaction.
• Payroll schedules, and every practitioner or contractor service agreement in full.
• Practice management activity reports, and billing by funding source.
• Lease and variations, equipment and finance schedules, and other trading contracts.
• Registrations, approvals, audit history, insurances and regulator correspondence.
• Group structure, constitution, trust deeds, shareholder agreements and loan accounts.
• Aggregate patient or participant metrics, marketing, and any dispute or known future event.

For the sequence rather than the list, see how it works.

Financial statements, tax returns and management accounts

This group establishes the earnings base; everything else either tests it or explains it.

Completed financial years

Signed financial statements and lodged income tax returns for the operating entity, with depreciation schedules and adjusting journals. Where the practice sits inside a group, the same is needed for each entity that holds an asset, employs staff, holds a lease or receives practice income.

The ATO requires most business records to be kept for five years, generally running from when the record was prepared or obtained, or the transaction completed, whichever is later, and notes that some must be kept longer.

The current year

Management accounts to the most recent complete month, with the trial balance, general ledger and aged receivables and payables listings. The current year often matters more than the earlier ones, because it shows the practice as it is at the valuation date.

Business activity statements and single touch payroll reporting are an independent cross-check: revenue in the accounts should reconcile to what was reported for goods and services tax, and wages to what was reported through payroll. Any difference is usually timing or coding, but it has to be identified before earnings are relied on.

Working capital and stock

The aged listings also set the level of working capital, the short-term funding tied up in receivables, payables and stock, which a purchaser expects to be handed over at a normal level. In pharmacy the point is sharper: dispensary and front-of-shop stock is a substantial asset in its own right, and a stocktake at or near the valuation date is usually needed.

Budgets, forecasts and earlier valuations

Forward-looking material is requested where the method calls for it: budgets, cash flow forecasts, business plans, and the meeting papers recording what the owners expected. Even where earnings are capitalised, forecasts show whether the latest year is representative.

Any earlier valuation, and the terms of any prior transaction in the shares or units, is requested as well. The ATO cautions that difficulties are likely where a valuer relies on a previous valuation compiled for a different purpose, and expects the current valuation to explain how the earlier one is relevant and confirm its information and assumptions still hold. A price paid is evidence of value only so far as the dealing was at arm's length, so prior dealings between unrelated parties can be useful market evidence while related party dealings usually are not.

All of this feeds maintainable earnings, the level of profit a business can be expected to sustain from its existing operations on arm's length terms, and the normalisation behind it: the adjustment of reported profit so it reflects the ongoing economics of the business rather than the current owner's arrangements, one-off events and tax planning. See what is maintainable earnings.

Payroll, contractors and service agreements

The Fair Work Ombudsman requires time and wages records to be kept for seven years, covering employment basis, pay rates, gross and net amounts, deductions, loadings, penalty rates and allowances, hours for casual and irregular part-time employees, leave, superannuation and termination details. The request adds award coverage by role, superannuation liabilities and workers compensation policies. On a transfer of business the old employer must give the new employer the records of any transferring employee.

Contractor and practitioner service agreements are requested in full, not summarised. What matters is the share of billings retained by the practice, the term, the notice period, any minimum session commitment, any restraint on practising nearby, and whether the agreement survives a sale of the business or of the shares. A practice whose principal earners can leave at short notice carries a different risk profile from one whose agreements hold through a change of control.

Contractor arrangements also carry a compliance question: state revenue offices have set out how the relevant contract provisions of payroll tax legislation apply to arrangements between medical centres and practitioners, so the accounts may show no payroll tax on those payments even where a purchaser would price the exposure. See payroll tax, contractor arrangements and medical practice value.

Practitioner activity and billing reports

The practice management system shows how the total in the accounts is made, and that is where healthcare valuations differ most from general ones.

The reports usually requested include billings by practitioner by month, sessions or hours worked, new and returning patient numbers, the service and item mix, the fee schedule, non-attendance rates, and utilisation of rooms, chairs or equipment. A pharmacy adds prescription volumes and the dispensary and retail split; an NDIS provider adds participant numbers, support categories and delivered hours. See pharmacy valuations and NDIS business valuations.

Billing is then requested by funding source. Where both bulk billed and privately billed services are provided the split is shown separately, because a shift in that mix changes revenue per service without any change in volume. Practice reports are reconciled to the funder's remittance statements where possible.

Two things come out of this material. The first is concentration, by practitioner and by payer, because earnings that depend on one person or one funding stream carry more risk. The second is goodwill, the value of a business above its identifiable net assets. Personal goodwill attaches to an individual practitioner and generally does not transfer on a sale; transferable goodwill attaches to the practice, its location, its systems and its patient relationships. Practitioner-level activity data is the main evidence for telling those apart.

Premises, equipment and contracts

For a location-dependent business the lease is often the most important document in the file: the executed lease and any variations, the remaining term and options, rent reviews, outgoings, permitted use, make good obligations, and any personal guarantee. Where the premises are owned by the owner, a family trust or a self-managed superannuation fund, that is identified so the rent can be normalised to a market rate. See premises and lease terms in healthcare valuations.

The equipment list should show each significant item, its age and condition, whether it is owned outright or subject to finance or a security interest, and what is approaching replacement. Where earnings are expressed before depreciation, replacement has to be dealt with somewhere: a chair, an imaging unit or a dispensing robot near the end of its life is a real cost a purchaser will price. Other contracts carry obligations that pass to a buyer, including clinical and practice management software, banner group or marketing agreements, wholesaler terms, and service agreements with hospitals, aged care homes or schools.

Registrations, approvals and compliance history

Much of the revenue depends on a registration or an approval, which is why these documents sit in the file.

Practitioner registration is verifiable on the public national register maintained by the Australian Health Practitioner Regulation Agency, which lists every practitioner registered to practise in Australia in the professions covered by the national scheme and publishes any conditions limiting what they may do. Not every discipline sits inside that scheme: Ahpra names speech pathologists among those working in healthcare who are not registered health practitioners, so there the evidence of practitioner standing comes from professional membership and funder approvals. See speech pathology practice valuations.

For a pharmacy, the approval to supply pharmaceutical benefits sits under the National Health Act 1953 and is administered by the Department of Health, Disability and Ageing, which manages applications to establish, relocate, resize or change the ownership of an approved pharmacy and provides secretariat support to the Australian Community Pharmacy Authority. That is a direct constraint on how, and to whom, a pharmacy can be sold.

For an NDIS provider, the NDIS Quality and Safeguards Commission requires an independent audit against the NDIS Practice Standards: a verification audit for lower risk, lower complexity supports, a certification audit for higher risk supports, and a mid-term audit part way through the registration period for providers that completed a certification audit. Audit reports and any non-conformities are requested, because they show whether the registration is secure. The Commission can also impose a condition audit where a change of ownership causes a significant change to the organisation or its governance, which makes that history relevant to a sale.

The same group covers professional indemnity and business insurance, incident and complaints records, worker screening, and correspondence with a regulator, funder or state health department. See government funding exposure and business value.

Ownership, structure and shareholder documents

These documents settle what is actually being valued: an organisational chart of the group, company extracts and the share or unit register, the constitution, trust deeds, shareholder or partnership agreements, buy-sell and pre-emptive rights provisions, related party loan agreements, and any option or earn-out.

A valuation of the whole business is not a valuation of one person's parcel. Enterprise value is the value of the business operations themselves, independent of how they are funded. Equity value is what the owners' interests are worth once surplus cash and other non-operating assets are added and interest-bearing debt is deducted. A parcel that cannot control distributions, appointments or a sale may be worth less per share than the same fraction of the whole, an adjustment usually described as a minority discount, and whether it applies turns on what the constitution and the agreement say. See share and equity valuations.

Patient and participant metrics, and the limits on them

A valuation needs the shape of the patient or participant base: active numbers, retention, new patient volumes, the catchment, waiting times, referrer concentration, marketing spend by channel and enquiry volumes. It does not need identified records.

The Office of the Australian Information Commissioner's guidance on selling a business says a vendor should avoid giving a prospective purchaser the names and other identifiers of its customers, should consider whether the information can be de-identified first, and should generally withhold personal information that cannot be de-identified where the person has not consented. Financial information, contractual documents and aggregated employee entitlement and customer information can usually be provided, with control kept through confidentiality terms and a controlled data room. The same discipline applies to material given to a valuer.

Disputes, claims and events that have not reached the accounts

Owners most often forget this group: current or threatened litigation, employment claims, a payroll tax review, a tax audit, a lease dispute, a regulator notification, an insurance claim, and any warranty or indemnity given in an earlier transaction.

Alongside those sit known future events. A practitioner who has resigned, a lease close to expiry with no option, a renegotiated funding arrangement, a service contract that will not be renewed: each belongs in the assessment where it is known or reasonably foreseeable at the valuation date. The ATO identifies the mirror image of that rule, reliance on post-valuation date information and on events that could not reasonably be foreseen at that date, as a common problem.

What changes with the purpose

The core list is stable; what sits around it moves.

For a tax matter the report itself carries more, because the ATO expects it to state the purpose and the provisions considered, the scope and its limitations, the valuation date, the methods chosen and why, any cross-check, and the assumptions. See tax and restructure valuations.

For a family law matter the disclosure obligation reaches beyond the practice. Rule 6.06 of the Federal Circuit and Family Court of Australia's family law rules requires disclosure of a party's total direct and indirect financial circumstances, including property and other financial resources held through corporations, trusts or similar structures, and of any property disposal in the year immediately before separation or since that may affect, defeat or deplete a claim. Related entities, loan accounts and trust deeds are commonly in scope. See valuing a healthcare business for family law.

For a sale, the valuation file and the due diligence pack overlap heavily, so assembling one shortens the other. See preparing a healthcare business for sale. The length of the request is also a fair signal of what is being produced: a one-page indication of price does not require much. See business valuation versus business appraisal.

How HPNA handles confidentiality

The request is scoped to what the conclusion actually requires and no further: aggregated and de-identified material wherever it will do the job, patient and participant information as counts and patterns rather than records, no clinical files, and employee information only at the level needed to cost the workforce. Material supplied is used for the stated purpose and is not disclosed to others except as the engagement or the law requires. Where a valuation is prepared for a court or a regulator, the material behind it may need to be produced to other parties, which is confirmed at the start.

When something on the list does not exist

Small practices do not always have signed agreements, a current equipment register or reconciled management accounts. That is common and workable, but the gap cannot be filled silently: where a document does not exist, the valuation records the assumption made in its place and its effect on the conclusion, or notes it as a limitation on scope.

To discuss the purpose, valuation date and scope of the request for a particular practice, request a valuation or speak with HPNA.