Business Valuation: Regulatory Requirements and Methodologies

Posted 21 October 2025 Written by Acts Online
Category Negotiating Tax Debt and Payment Arrangements with SARS

Brought to you by SA Accounting Academy: This article provides a technical overview of business valuation methodologies and the regulatory expectations for financial professionals under South African tax and accounting frameworks.

In terms of the Income Tax Act, No. 58 of 1962, particularly regarding the disposal of assets between connected persons, business valuations must reflect fair market value to withstand scrutiny from the South African Revenue Service (SARS). SARS has increased its vigilance regarding net asset value (NAV) calculations, especially for service-based businesses where tangible assets do not represent the entity’s full economic value. Furthermore, the third edition of IFRS for SMEs shifts toward a fair value framework, necessitating formal valuations for financial reporting, impairment testing, and investment disclosures.

Primary Valuation Methodologies

Financial professionals should utilise at least two models to establish a reasonable valuation range. The three primary approaches include:

  • Net Asset Value (NAV): Calculated as the fair market value of assets minus liabilities. While appropriate for capital-intensive industries or liquidation scenarios, it often fails to capture intangible goodwill or internally generated assets.
  • Discounted Cash Flow (DCF): This method projects free cash flows over a three-to-five-year period, discounted to present value using the Weighted Average Cost of Capital (WACC). It is considered the most objective method as cash flows are less susceptible to manipulation than earnings.
  • Maintainable Earnings (Multiplier): Common for SMEs, this involves normalising earnings by stripping out non-recurring items and owner-specific expenses, then applying a multiplier (typically ranging from 2 to 5).

Risk Assessment and Capital Costing

The Capital Asset Pricing Model (CAPM) remains the standard for determining the cost of equity, utilising South African government bonds as the risk-free rate. The WACC must reflect current market rates rather than historical costs. Practitioners must also account for a ‘control premium’ when valuing majority stakes, as the ability to influence strategy and distributions carries inherent value beyond the share certificate.

A defensible valuation report must include a clear scope, industry analysis, SWOT assessment, and a detailed reconciliation of the methodologies used. Transparency regarding growth rates, discount rates, and risk factors is essential for compliance with professional standards and regulatory reviews.

What this means for you, your business, or your clients

  • For yourself: You must document every normalization adjustment and risk assumption in your valuation reports to ensure they are defensible during SARS audits or legal disputes.
  • For your business: Ensure that shareholder agreements incorporate annual valuation provisions to provide a regular ‘pulse check’ and facilitate smoother transitions or buy-outs.
  • For your clients: Advise clients involved in connected-person transfers that they must obtain formal market valuations rather than relying on book values to mitigate the risk of SARS-imposed capital gains tax adjustments.

Originally published at https://accountingacademy.co.za/news/read/the-art-and-science-of-business-valuation-a-practical-guide-for-financial-professionals

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