How is a business valued?

Valuing a business is not a precise science. Much will depend on the experience of the valuer. Your accountant is probably your first port of call. Even if s/he does not do this sort of work, s/he may know valuers in your area. In addition, business transfer agents specialise in business valuations. There are a number of national firms in this market, all of whom have local offices in the major cities. They combine a national reach with local knowledge.

Alternatively, give us a call; we have contacts in this field throughout the country to whom we can refer you. We would be able to do this for you as part of our pre-sale service.

Common Valuation Considerations

The valuer will need to look at a wide range of factors to come up with a value. These include:

  1. The history and development of the business;
  2. Details of shareholder agreements (and rights attached to classes of shares);
  3. The price or value agreed for any previous share transfers;
  4. All information circulated to shareholders by the company;
  5. Details of a company’s/business’s market share, main competitors, contracts with customers and dependence on specific customers;
  6. Audited and management accounts;
  7. Trading prospects, including budgets and forecasts;
  8. Details of claims or litigation against the business or contingent liabilities such as environmental matters.

Most of this information is necessary for both business (asset) sale and share sale, save for items 2 and 3. Obviously, information about the company will not apply in an assets sale. Some of the methods that might be used are mentioned below. The valuer will also take into account the values achieved on recent comparable business sales in your industry and location.

How do I value the assets of my business?

The “tangible” (physical) assets of a business are not so difficult to value, for example, machinery, vehicles and property. Some intangible assets, for example, intellectual property rights (patents, trademarks and the like), can also be valued by a specialist valuer. The question is: what are they worth in the open market?

Goodwill is more difficult to value. The gap between what the seller believes the goodwill of the business is worth and the amount the buyer is prepared to pay can be a wide one.

The valuer may take an average of previous years’ profits and select a multiplier appropriate to the kind of business to arrive at a figure. What is “appropriate” depends on the kind of business it is, for example:

Business type X / size Y x location Z

The figure for goodwill is then added to the value of the other assets to arrive at the sale figure.

How do I value the shares in my company?

Most share valuations are “earnings” based, where a valuer has to estimate a company’s future profits and then apply a multiple to this profit.

Estimating future profits requires a review of the trend of past and current performance, with adjustment for items which may not have been incurred for the benefit of a company’s business or are “one-off” items.

This is the “p/e” (price/earnings) method. In addition:

  • Net Asset Value (NAV) – the Balance Sheet is assessed to see how much is owed to the shareholders i.e. Fixed Assets + Current Assets minus (Current Liabilities + Long term liabilities).  The resultant figure is the NAV.
  • Profits/earnings calculation – an average figure for, say, 3 previous years’ profits is taken and then multiplied by a suitable industry multiplier.
  • Discounted Cash Flow – sometimes it might be appropriate to calculate the projected cash flow for the next, say, 10 years and then to apply a suitable discount.