Business Valuation Services
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Our Share and Business Valuation Service
Business valuations are often required as part of a corporate finance transaction to help you to determine if you are selling or buying a business for a reasonable price. There are also other reasons why you may need to calculate the value of your business including for tax purposes. Here we consider the range of methods available as well as some of the factors to consider during the process.
It is important to remember that valuing a business is something of an art, albeit an art backed by science and our experienced corporate finance specialists will undertake the process on your behalf.
Why do I need a company valuation?
One of the most common reasons for valuing a business is for sale purposes. Initially a valuation may be performed simply for information purposes, perhaps when planning an exit route from the business. When the time for sale arrives, owners need a starting point for negotiations with a prospective buyer and a valuation will be needed.
Valuations are also commonly required for specific share valuation reasons.
For example, share valuations for tax purposes may be required:
On gifts or sales of shares
On the death of a shareholder
On events in respect of trusts which give rise to a tax charge
For capital gains tax purposes
When certain transactions in companies take place, for example, purchase of own shares by the company.
Share valuations may also be required:
Under provisions in a company’s Articles of Association
Under shareholders’ or other agreements
In disputes between shareholders
For financial settlements in divorce
In insolvency and/or bankruptcy matters.
When a business needs to raise equity capital a valuation will help establish a price for a new share issue.
Benefits you may not have considered:
Valuing a business can also help motivate staff.
Regular valuations provide measurement criteria for management in order to help them evaluate how the business is performing. This may also extend to share valuations for entry into an employee share option scheme, for example; again used to motivate staff.
Meet our valuation experts
Meet our valuation experts
Valuation methods
While there is a ready made market and market price for the owners of listed public limited company shares, those needing a valuation for a private company need to be more creative. Various valuation methods have developed over the years. These can be used as a starting point and basis for negotiation when it comes to selling a business.
Valuation methods include:
Earnings Multiple
Earnings multiples are commonly used to value businesses with an established, profitable history.
Often, a price earnings ratio (P/E ratio) is used, which represents the value of a business divided by its profits after tax. To obtain a valuation, this ratio is then multiplied by current profits. Here the calculation of the profit figure itself does depend on circumstances and will be adjusted for relevant factors.
A difficulty with this method for private companies is in establishing an appropriate P/E ratio to use – these vary widely. P/E ratios for quoted companies can be found in the financial press and one for a business in the same sector can be used as a general starting point. However, this needs to be discounted heavily as shares in quoted companies are much easier to buy and sell, making them more attractive to investors.
As a rule of thumb, typically the P/E ratio of a small unquoted company is 50% lower than a comparable quoted company. Generally, small unquoted businesses are valued at somewhere between five and ten times their annual post tax profit. Of course, particular market conditions can affect this, with boom industries seeing their P/E ratios increase.
A similar method uses EBITDA (earnings before interest, tax, depreciation and amortisation), a term which essentially defines the cash profits of a business. Again an appropriate multiple is applied.
Discounted cashflow
Generally appropriate for cash-generating, mature, stable businesses and those with good long-term prospects, this more technical method depends heavily on the assumptions made about long-term business conditions. Essentially, the valuation is based on a cash flow forecast for a number of years forward plus a residual business value. The current value is then calculated using a discount rate, so that the value of the business can be established in today’s terms.
Entry cost
This method of valuation reflects the costs involved in setting up a business from scratch. Here the costs of purchasing assets, recruiting and training staff, developing products, building up a customer base, etc are the starting point for the valuation. A prospective buyer may look to reduce this for any cost savings they believe they could make.
Asset based
This type of valuation method is most suited to businesses with a significant amount of tangible assets, for example, a stable, asset rich property or manufacturing business. The method does not however take account of future earnings and is based on the sum of assets less liabilities. The starting point for the valuation is the assets per the accounts, which will then be adjusted to reflect current market rates.
Industry rules of thumb
Where buying and selling a business is common, certain industry-wide rules of thumb may develop. For example, the number of outlets for an estate agency business or recurring fees for an accountancy practice.
Other valuation considerations
With any of the valuation methods discussed above, it is important to remember that valuing a business is not a precise science. In the end, any price established by the methods described above will be a matter for negotiation and more than one of the methods above will be used in the process. Ultimately, when the time for sale comes, a business is worth what someone is prepared to pay for it at that point in time.
There are a number of other factors to be considered during the valuation process. These may help to greatly enhance, or unfortunately reduce, the value of a business depending upon their significance.
Considerations include:
Growth potential
External factors (such as the economic climate)
Intangible assets
Individual business circumstances
