Business Valuation – How to value a business

13 July 2019 | Blogs, Resources

Valuation of a Business

Frazer Hall offers business valuations. Such a service is useful to both companies interested in the value of their business and to small accountancy firms who do not have the in-house expertise to carry out such work themselves.

There are many reasons that you, as a business owner, wants to value your business. For example, to understand the worth of the business or to set a base line value for the business to develop future strategies. You may be considering splitting the business between one or more partners or need to settle a shareholder or partnership dispute. Maybe you require a valuation to obtain bank financing or for exit strategy planning. Or it could be that you wish to agree a value to negotiate a sale.

In this blog post you will read some of the typical methods and processes that we use to value a business.

How to Value a Business

You can use a range of methods to value unquoted or private businesses. These are usually applied to limited companies (largely, as partnerships are in general, smaller), but can apply equally to partnerships. These are briefly summarised as:

Earnings based valuation

This method of valuation estimates the underlying profit of the business, considering any adjustments to costs or income that would not recur on a standalone basis. A multiple of profit is applied to this, this multiple taking into account the barriers to entry incumbent with that industry, the size of the company, as well as its growth prospects and market conditions.

The price derived from multiplying profitability is an ‘enterprise value’, from which, any debt in the balance sheet is deducted and any surplus cash added.

Balance sheet or net asset value

This tends to be appropriate when profitability is low relative to net assets, or where stock, debtors or capital equipment are high relative to profitability. Where a business is valued on balance sheet net assets, there is sometimes an element of goodwill added to the balance sheet value, often in the form of an earn-out relating to one or more years’ profit.

A dividend yield

This tends to be used with limited companies, where regular dividends are paid to a group of passive shareholders that derive income from share ownership, rather than as working employees and directors.

Balance sheet wind-up value

The principle of winding up the company is often based on the premise that it will yield a greater return to the shareholders than a trade sale. In practice, this usually means that there are no trade buyers and more often than not, that the company being wound up does not have a viable trading future. A company being wound up might incur redundancy costs, closure costs, contingent liabilities (such as ongoing lease agreements); it can also mean that sale of stock becomes heavily discounted and so the eventual value of the wound-up company can be appreciably lower than balance sheet net asset value.

Discounted cashflow

This is a comparatively sophisticated method of measuring future earnings at current prices; it is often applied where a business has some certainty of fast future growth, such as a software company, where development is likely to lead to substantially higher future earnings.

Whatever the reason for your interest, Frazer Hall has the expertise to accurately value your business, contact us today!

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