The process of valuing a business can give you a valuable insight on the right time to sell and key aspects for moving negotiations along quickly.
A valuation can also help you and your team focus on areas for improvement and growing the business.
And if employees are being offered options over shares in the company, it can help you set an appropriate price. Crucially important can be ensuring the price is something the relevant tax authorities will accept, including if tax-approved schemes are being considered.
Harwood Hutton partner Adam Stronach has been voted the leading expert in England on business valuations.
Here, he sets out some of the things to think about when undertaking a business valuation:
Operational structure: Can the business function effectively if the existing owners are no longer involved operationally? An exercise may be needed to assess second tier management and look at ways of streamlining, automating or delegating work.
Circumstances: If under pressure to sell quickly – for instance, because the business needs to discharge loans or pay off creditors – the price may be lower than if you have time to achieve a better deal.
Financial record: Detailed, accurate records that show a sustained history of strong financial performance will work in your favour when your business is being valued.
Reputation and customers: Do people have a positive impression of the quality of your product or service? Do you have a solid base of returning customers who trust your brand? How robust is the customer base?
Staff: A loyal team of people who work well together is important, but remember to consider how much of the business is reliant on its existing leaders.
Intellectual property: What’s the value of any licences or similar assets that your business owns? Do you have software, for example, or innovative designs for your products?
Product or service: Is yours a high-margin, low-volume business, or does it depend on lower value products or services sold in high volumes? How does your business compare when benchmarked against competitors?
Age of the business: Businesses in their early stages may have a lot of potential but may be making losses. More established businesses tend to face fewer risks, but there may be less of a growth upside.
Business valuation methods
The most appropriate valuation method for your business will depend largely on the type of business you operate: the sector it’s in, the size of the business, how long it’s been running, and so on.
Most people will use a combination of methods to reach a final assessment of value.
1. Valuing assets
This method looks at the value of the assets owned by your business, takes away any liabilities, and bases the overall value on that figure. This makes the most sense if you have an investment or property business, with valuable assets largely responsible for the returns the business enjoys.
Intangible assets, including the goodwill your workforce helps to build, or intellectual property like licences tend to be much harder to value. Businesses that rely more on these assets than tangible ones will generally need to consider an alternative method.
2. Discounted cashflow
This method assesses what a business’s future cashflow might be worth today. The business’s value is worked out applying discount rates to take into account potential risks and the required returns investors would want..
This method is involved and relies on forward looking assumptions. It is often applied to businesses that are changing in nature, or young, growing businesses. But it does rely on accurate and reliable forecasting of the cash the business may be able to generate.
3. Multiples approach
This method is often applied to trading business, and uses a ratio or multiple based on market metrics for other similar businesses.
Subject to additional adjustments, a ‘multiple’ is derived and applied to maintainable earnings. This approach is often considered by buyers or investors working up an offer price for a company.
If you would like to discuss how you go about valuing your business, contact Adam Stronach
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