There are many reasons why you may wish to know the true monetary value of your business, with putting your business up for sale, raising equity capital, and valuing shares for tax purposes three of the most common.
Of course, the reason for valuing your business isn’t as important as the method you choose to do so. Whether you’re looking for an immediate sale, or you simply want to establish a new share issue price based on your business’s recent performance, keep in mind that regardless of the method you choose, your maximum selling price will never be more than what a buyer is willing to pay for it.
Private companies (such as small and medium-sized businesses), unlike public companies, aren’t listed on a public stock exchange and, therefore, finding the value of your private company requires a little more work.
Below we have summarised the four most common valuation methods used to value British private businesses:
The earnings multiples method of business valuation is the most common method for valuing a business that has a been around, making a profit, for a number of years.
Under this method a price earnings ratio is often used, with the value of your business being divided by its post-tax profits, with this ratio then being multiplied by your current profits. If you’re valuing your business for the first time it’s often hard to know what your price earnings ratio should be. Luckily, most accountants (including us here at Tax Agility) can provide you with common multiples for your sector.
The discounted cashflow method is the valuation method for you if your business has been around for a long time, is stable, and it generates a lot of cash. Businesses with good future prospects can also benefit from using this method.
With the discounted cashflow method, your business’s valuation is based on a cash flow forecast a number of years out, alongside a residual business value.
Cost of Entry
Not one of the more popular valuation methods; when you value your business based on the costs associated with setting up an identical business from scratch, you have to consider every cost imaginable, including:
- Employee recruitment and training
- Upfront asset costs and continued maintenance
- Product development (research and development)
- The cost of establishing your customer base
Known as an asset-based business valuation, you should only value your business in this manner if you own a large number of tangible (physical) assets, such a property (offices, factories) or machinery.
This method of valuation does not take into account your business’s future earnings; it’s based only on the value of your assets, minus liabilities.
What Else to Consider
There are, of course, other factors that should also be taken into account when valuing your business, regardless of the valuation method you choose. They are:
- The business’s potential for growth: Is your business in a growth industry and, if not, how is it adapting to these new market conditions?
- Outside (external) factors: These include the general state of the economy, as well as the general state of your industry.
- Intangible assets: Anything that’s a clear asset to your business, such as strong brand identity or exceptional sales staff, go here.
- Industry rules: Certain industries have rules of thumb that are applied to businesses within that industry when being valued.
- The circumstances surrounding the valuation: If you’re looking for a quick sale of your business, for whatever reason, this will reduce its perceived value.
To speak with a professional accountant to discuss which valuation method is most appropriate for your business, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.