Whether you are planning to sell your UK business, applying for a new round of funding or simply curious about what your company is worth, you might at some point find yourself contemplating a company valuation. This could yield very different results depending on the kind of business you have and may be complicated to work through if you are new to it. Here, we offer a quick guide to the basics:
What is a company valuation?
A company valuation, also known as business valuation, is a process that determines the market value of your business based on a number of measures. It is conducted for a variety of reasons, such as:
- Securing a bank loan
- Expanding the business
- Adding a business partner
- Prior to selling the business
- Supporting financial reports
- Buying out a business partner
- Approaching investors for funding
- Setting a fair share price for employees who want to buy or sell company shares
What impacts the value of a business?
Various company valuation methods might be employed to value your business. Your company’s assets and liabilities are a big factor at the broadest level. Other factors include:
- Team strength
- Any trademarks
- The type of product
- The age of the company
- The value of the company’s customers
What are the methods of business valuation?
Some valuation methods that might be used for your business include:
1. Price-to-earnings ratio
This is generally used for businesses with a history of sustainable profits and essentially involves multiple profits. Any one-off amounts are removed, and a ‘normalised’ earning figure is reached. P/E (price-earnings) ratios are higher for high-growth companies like tech startups and lower for more mature businesses. While P/E ratios vary widely, generally, a ratio of four to ten might be considered suitable.
2. Discounted cash flow
This is used for mature businesses that generate steady amounts of cash. Essentially, it estimates what a future cash flow would be worth today. One way to do that is by calculating the dividend value for a period of, say, 15 years and then adding a residual amount at the end of the period. The discount rate considers the risk and time value of the money under the assumption that a pound today is worth more than a pound tomorrow.
3. Asset valuation
This is a good idea for mature businesses with significant tangible assets, such as property businesses. The ‘net book value’ of the assets in the books of accounts is adjusted to reflect external factors like bad debts, changes in property value or depreciation.
4. Cost of business creation
Also known as entry cost, this method takes into account the setup costs of a business similar to the one in question. This includes startup costs, the costs of tangible assets, research and development costs, recruiting and training costs and so on.
5. Industry-specific methods
In some cases, like an estate agency, the value of a business depends on the number of branches the agency has. Or, a retail business might be valued based on turnover or the number of outlets. These are more like rules of thumb, depending on factors other than profit.
When getting your business valued, it is essential to remember that you neither want to overvalue nor undervalue it. Therefore, we recommend using at least two valuation methods and combining the results.
Who is qualified to do a business valuation?
As with any business function, you want a trustworthy professional to handle the valuation. Usually, this will be either an accountant or a business transfer agent:
1. Accountant
Your accountant knows your business well and may thus be an ideal person to give you a business valuation. This is particularly useful if you are engaged in succession planning, exiting the business, getting an equity partner, or need tax advice when selling a business.
However, what will often happen is that the accountant will recommend a business transfer agent whom they have a professional tie-up with. At Birdfynn Accountants, we devote time to comprehend the distinctiveness of your business and evaluate all aspects pertinent to your objectives and present worth, which will undoubtedly impact the result.
Our team possesses specialised proficiency in selecting appropriate business valuation approaches. As each business has different requirements, we do not rely on a single standard procedure but select the most suitable method that aligns with the valuation and the situation.
2. Business transfer agent
Also known as a business broker, a business transfer agent has the experience and the technical knowledge to conduct an accurate valuation of your business. They will typically have access to various datasets indicating how much other businesses of your size and in your sector were valued at, including details of mitigating factors like assets, fixtures or locations.
They will also take the current market and economic conditions into account when assigning a value. And finally, they will know how the current business marketplace works, enabling them to provide solid advice on when to sell your business for the most profit.
3. DIY valuation
There is a third option – where you value your business yourself. However, the valuation process is a highly technical one, and the risks of miscalculation far outweigh any money you save by doing it yourself. That is why it makes sense to go with your accountant or a professional business transfer agent.
How do I value a business to sell?
Typically, the following steps are taken to determine your business’ value:
1. Calculate how healthy the business is
This is the first step and involves considerable research and possibly talking to the business’ customers and suppliers. Factors to consider here include:
- Current performance
- Future projections
- The history of the company
- The reason behind the business being sold
- Any litigation the business may be involved in
- Financial health, including debts and cash flow
- Regulatory changes that might impact business value
2. Find out the value of intangible assets
Such assets can be difficult to assign monetary values to but are critical to determining overall business value. Intangible assets include:
- Goodwill
- Company reputation
- The value of any licences
- Relationship with suppliers
- Intellectual property, such as patents or trademarks
3. Other considerations
Other things that affect the value of your business include:
- Stock
- Location
- Products
- Debtors and creditors
- The amount of competition
- Economic/political climate
- Number/qualifications of employees
- Premises, including furniture and fittings
- Other businesses in the sector that are currently for sale
- Value benchmarking with how much similar businesses have sold for
Final words
It is important to remember that company valuation is not a constant. You can improve your valuation by having well-thought-out business plans, diversifying your risks and implementing smart processes that save money.
And remember, every business is unique, so ask Birdfynn’s accountants to look for ways to optimise what yours is worth. Contact us today!
