How to value your business

Methods of company valuation

Valuing your business

Understanding what your company is worth is a core consideration for many business owners. It is important to understand the value of your business, as it could affect future plans.

It is not uncommon that as a business owner who has created, nurtured, grown and has huge pride in their business to overestimate how much their own business is worth.

Valuation is a complex area and one where business owners need expert help to get a truly accurate valuation. To get an accurate valuation requires not only an in-depth understanding of the market, the asset in question, the company and its competitors, but will also take into account a wealth of financial and non-financial information.

Whilst experts can use traditional valuation techniques to value a business, the true value of a business is the balance between the price a seller is willing to sell for, and the price a buyer is willing to pay for the business. Valuation methods are however useful as an indicative guide on what your business is worth.

There are several ways to value a business and we will cover the most common methods on the following pages…

Valuation based on multiples of income

Valuation based on multiples often looks at similar companies and uses financial data to help determine a company’s value. A financial ratio (or ‘multiple’) is applied to the company being valued.

Companies are often valued using a multiple of their sustainable profit after adjusting for exceptional items and then adjustments relating to surplus assets and debt from the balance sheet are made. Sustainable profit can take a variety of forms including EBITDA (Earnings Before Interest, Tax Depreciation and Amortisation), EBIT, or even simply normalised profit/earnings. Valuations are typically on a ‘cash and debt free’ basis.

The multiple will vary by sector, size and profitability of the business. Other factors when valuing a business include contracted income, growth trajectory, and the strength of the management team. Negative factors that can affect value are the current cost of debt in the market, and wider market conditions.

Other valuation methods

There are other valuation methods such as liquidation basis and dividend yield and whilst these are less common for SMEs, Barnes Roffe are able to explore all options.

Asset based valuation

For property or asset rich companies where the underlying value of the business is in its assets rather than in its ability to generate profit, valuation will be based largely on their balance sheet.

For this method, you determine Net Book Value (NBV) of the business using the assets recorded in the company’s accounts, then assessing the future value of these assets based on current market trends and management conditions. A good example of this is a business in the property rental sector.

However, despite all the valuation methods above, sometimes it can simply come down to what the buyer is willing to pay for your business. If your company ticks all a buyers boxes for them individually and there aren’t many other companies that can offer that, then a buyer will be willing to pay a higher price.