Tag Archives: business valuation


There are a number of different ways of valuing a company and a number of factors to take into account:

  • Net Asset ValuationWhat are the assets? Tangible/intangible: Tangibles are generally the hard assets like plant & equipment, stock, debtors and cash. Intangibles are things like goodwill and IPR.Purchasers will generally ignore Intangibles on a Balance Sheet as it is effectively double valuing goodwill when pricing in a Goodwill Premium for the company.Very often a company will have its assets valued within its books at a price which can only be justified if the company is still in business, whereas if the company went into receivership those same assets may only be worth a fraction of their book value because of age, specialisation or difficulties in removing them from the premises.If the company is sold for Net Asset Value then there may also be redundancy and lease dilapidation and termination costs to be taken into account by a purchaser, which could depress the valuation.
  • Accounting Rate of Return (ARR) or Return on Capital Employed (ROCE)This is essentially looking at the total amount of money required to buy and run the business (including all bank debt and HP leases), then looking at the EBIT (= earnings before interest and tax) and deciding whether that is a satisfactory return on the investment given the risks involved.
  • Discounted cashflowsThis is an actuarial calculation involving calculating the overall cashflow demands and returns of the company over a period of say 7 years and then discounting them back to their net present value. It is safe to say that this method is usually only used for larger corporations or new and substantial businesses.
  • Internal rate of Return (IRR)This method is generally used when the transaction is highly geared and is normally used by venture-capital investors. An example is, if you buy a £300,000 investment property with a £250,000 mortgage and then sell it three years later for £500,000 then your IRR (assuming that the mortgage has not reduced and the rent has equalled the mortgage interest costs) is going to be your capital gain of £200k as a percentage of your original investment of £50k divided by the number of years you held the investment. i.e. (250/50)/3 = 166%IRR
  • P/E and MultiplesThis means looking at the pre and post tax profit of the company and then multiplying it by a number which is usually somewhere between 1-10. The lower the multiple means the higher the risk and the less sustainable the profit stream.The term “multiple” is usually used for pre-tax numbers and “p/e” for post-tax numbers. It is sensible however when using these terms to make it clear that you are talking about either pre or post tax numbers. There is a big difference between the two, a pre-tax multiple of 4 is about the same as a post p/e of 6.

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Company Worth Business Valuation new advert 25.08.2013- App by RPC


The following are some ideas that should be explored in order to maximize the amount of money that the vendors receive and to show the company in the best light:

  • Take out all or part of the cash  There may be no need to keep all the cash within the company. This could be distributed by way of dividend, payment into the owner’s pension fund or repayment of any directors’ loans. Alternatively if it’s more tax effective to do so, then the sale price can be inflated by the cash at bank figure so that in addition to the agreed purchase price, the purchaser pays “cash for cash”.
  • Make sure NAV matches up with p/e, ROCE valuation  Sometimes the Net Asset Value (NAV) is out of kilter with any normal valuation of the business, this can for example be because the company owns its premises. In that case it may be sensible to move the property into the director’s pension fund and lease the property back to the company; this will reduce the profitability but will transfer an asset with a good yield into the director’s pension. You should do the calculation to see if the benefit of extracting the property asset from the company exceeds the resulting reduction in the goodwill value because of the lower profit figure.
  • Repay directors’ loans  These should be repaid prior to a sale, if the cash is available. If it is not then they will normally be repaid out of/deducted from the sale proceeds at completion.
  • Sell car to owner   Very often the owner will have a car that they will want to keep after completion but which is owned by the company. Legally the company is entitled to keep the car, however if the owner wants to keep it, it needs to be either transferred before completion or specifically identified and excluded in the sales memorandum.
  • Do a stock-take  This should be done before putting the company on the market as this is the classic area in which purchasers chip away at the price. The vendor needs to clear out or write off any old or redundant stock so that the balance sheet is a true reflection of the company’s net worth.
  • Clean up the balance sheetThe projected completion balance sheet should look clean and tidy and not contain any items which need explanation or which cause the purchaser to worry about the can of worms he is about to buy!

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Every deal is different and purchasers and vendors may have different ways of achieving what they want. Some examples:

“Earn-Out” means that a part of the purchase price may be paid to the vendors over a period of time after completion (“on the drip”) provided for example that they stay working for the company and/or the company achieves certain pre-agreed profit or other targets.

“Vendor Financed” means that part of the purchase price may be loaned to the purchaser by the vendor to enable completion to take place. Normally the vendor will get, as security for the loan, either loan notes or a hybrid form of shares; they may also get a mortgage over the company, although this is usually a second mortgage behind the bank or a personal guarantee from the purchaser. Vendors traditionally are reluctant to provide this sort of finance; however it may be required in order to achieve the sale price they are seeking.

“Lock-Step” means that the purchasers buy an initial shareholding which is then increased as certain milestones are achieved.

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The traditional/usual steps involved in selling a company are as follows:

1)    Groom the Company for sale and clean up the Balance Sheet

2)    Finalise the Completion Balance Sheet and the Adjusted EBITDA

3)    Fix the Asking Price based on the Balance Sheet and Adjusted EBITDA

4)    Draft and issue the Sales Memorandum

5)    Deal with Purchaser enquiries

6)    Ensure Purchasers have funding capability

7)    Obtain Offers

8)    Accept an Offer

9)    Negotiate and agree Heads of Terms (HoT) between Purchaser and Vendor

10)Agree a timetable for completion

11)Purchasers begin commercial and legal due diligence

12)Purchasers begin accounting due diligence

13)Purchasers’ solicitors issue draft Share Purchase Agreement (SPA)

14)The terms of the Share Purchase Agreement are negotiated and agreed; it includes Vendor Warranties; TUPE obligations; Tax Deed – warranties and Indemnities; Payment terms including any escrow payments or deferred payments, earn-outs etc

15)Remove personal guarantees with Bank; obtain Bank’s approval to sale if required.

16)Exchange & Completion of the Agreement is usually simultaneous primarily because the trading of the company is a moving target and the warranties and completion accounts are only valid and applicable at the time of completion

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The first thing to get right in company sales is to find out whether the purchaser is buying the shares in the company or the assets out of the company.

A company is a separate legal entity and it (not the shareholders) owns its assets. The shareholders own shares in the company which in turn owns the assets.

Consequently if the shares are being sold then the vendors are the shareholders.

But if the assets are being sold then the vendor is the company.

Often a purchaser will want to buy the assets from the company, because they are easily identifiable and the purchaser does not have to worry about what else may be inside the company.

A vendor on the other hand will generally want to sell his shares in the company because it is considerably more tax effective for him to do so.


If the parties agree to do an asset sale then the Vendor will be the company and it will be selling certain nominated assets such as Plant, Stock and Goodwill. It may also be selling its Debtors or the Purchaser may agree to collect the Debtors and pay them to the vendor company as part of the sale price.
Normally in an asset sale the vendor company retains the liabilities and uses the sale proceeds received to pay them off. Once the liabilities are paid off the remainder of the sale proceeds are retained in the company, or paid out to the shareholders as dividends, or the company is liquidated and the cash paid to the shareholders. These last two alternatives have significant tax implications.


When a purchaser buys the shares in a company he buys the company and everything inside it. Unless specifically excluded in the share purchase agreement (“SPA”), this includes stock, creditors, liabilities, plant & machinery, employment obligations, lawsuits, claims, real estate, cars, goodwill, IPR (intellectual property rights) and cash.

This means that a company should be groomed for sale before the sales memorandum is issued. If there are any problems or issues within the company such as loans to directors or claims by employees, then generally these should be solved before issuing the sales memorandum or should be fully disclosed within it. A purchaser will inherit all of those problems and liabilities if he buys the company so he needs to know about them before doing the deal and he may discount the value he places on the company in order to take account of those problems.

Similarly there may be surplus cash balances or loans from directors or banks which may need to be distributed or repaid before completion or to be specifically identified in the Sales Memorandum either to increase or to justify the asking price.


The reason why a vendor will be so keen to sell his shares rather than for the company to sell its assets is principally tax. In essence if a vendor sells his shares then, provided the company fits within certain criteria set out by HMRC, he will pay Capital Gains Tax at the rate of 10% on the gain between what he paid for the shares and what he sells them for less transaction costs. This is known as Entrepreneurs Relief. (There are some exceptions to this rule but generally in the case of a typical owner/manager, this is the case).

On the other hand, if a company sells its assets then it will pay corporation tax on the gain it has made on the asset sale (there is no capital gains tax for companies) being the premium paid over their book value. The cash then sits inside the company and can generally only be distributed to the shareholders by way of dividend or by liquidating the company and distributing the cash reserves to the shareholders.


These are some of the advantages of pursuing a share sale:

  • Appearance of continuity of business. A change of name or trading style may give the impression that the business has changed hands or worse, gone bust and done a phoenix.
  • There may also be customer and supply contracts which will be difficult to re-write in the name of a new company.
  • It may be easier to get a landlord to agree to the change of shareholding rather than having to enter into an assignment of the property lease; and it will almost certainly be considerably less expensive in terms of legal fees.
  • Intellectual Property Rights (“IPR”) traditionally are messy and complicated, particularly copyright in software. It may be almost impossible to create a chain of title and even more difficult to get all parties to agree to an assignment from the company to the purchaser. It may be considerably easier to “let sleeping dogs lie”.
  • A purchaser may prefer to leave the company’s banking arrangements in place; this is particularly the case in respect of leased plant and machinery and term loans. Although a bank will normally want to be satisfied as to the probity and credit-worthiness of the purchaser.
  • The company may have historical tax losses inside it, which a purchaser may find useful. A vendor may try to increase the price because of these tax losses although that is difficult to do and most purchasers will not pay a premium for them..
  • There may be other contractual arrangements also in place with the company which could be difficult to assign to a new company, such as options arrangements with staff, other employment contracts, future royalty contracts, licences etc.

As stated previously the sale of shares in a company for which the vendor gets Entrepreneur’s Relief, attracts a 10% flat capital gains tax rate provided the shares have been held for more than 1 year.

If a company sells its assets then it pays corporation tax on the gain and the shareholders pay income tax on any dividend distribution of the asset sale proceeds.

Stamp duty is 0.5% on a sale of shares and on other property (such as debtors and real estate) it is a sliding scale up to 7%.

Call now for a FREE, no obligation business valuation. Your call will be treated in the strictest confidence and of course, places you under no obligation.

Call now on 0800 046 1792.