Tag Archives: businessvaluationuk

VALUING A COMPANY

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.

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.

Company Worth Business Valuation new advert 25.08.2013- App by RPC

What Is Business Valuation?

Quite simply, business valuation is a process and a set of procedures used to determine What Is Business Valuation?. While this sounds easy enough, getting your business valuation done right takes preparation and thought.

Business valuation results depend on your assumptions

business-valuation

For one thing, there is no one way to establish what a business is worth. That’s because business value means different things to different people.

A business owner may believe that the business connection to the community it serves is worth a lot. An investor may think that the business value is entirely defined by its historic income.

In addition, economic conditions affect what people believe a business is worth. For instance, when jobs are scarce, more business buyers enter the market and increased competition results in higher business selling prices.

The circumstances of a business sale also affect the business value. There is a big difference between a business that is shown as part of a well-planned marketing effort to attract many interested buyers and a quick sale of business assets at an auction.

Expected selling price and business value

Hence, business value is really an expected price the business would sell for. The real price may vary quite a bit depending on who determines the business value. Compare a buyer who wants the business now because it fits important lifestyle goals to a buyer that purchases an income stream at the lowest price possible.

The selling price also depends on how the business sale is handled. Contrast a well-conducted business marketing campaign and a “fire sale”.

Three business valuation approaches

That said, there are three fundamental ways to measure what a business is worth:

  1. Asset Approach
  2. Market Approach
  3. Income Approach

Asset approach

The asset approach views the business as a set of assets and liabilities that are used as building blocks to construct the picture of business value. The asset approach is based on the so-called economic principle of substitution which addresses this question:

What will it cost to create another business like this one that will produce the same economic benefits for its owners?

Since every operating business has assets and liabilities, a natural way to address this question is to determine the value of these assets and liabilities. The difference is the business value.

Sounds simple enough, but the challenge is in the details: figuring out what assets and liabilities to include in the valuation, choosing a standard of measuring their value, and then actually determining what each asset and liability is worth.

For example, many business balance sheets may not include the most important business assets such as internally developed products and proprietary ways of doing business. If the business owner did not pay for them, they don’t get recorded on the “cost-basis” balance sheet!

But the real value of such assets may be far greater than all the “recorded” assets combined. Imagine a business without its special products or services that make it unique and bring customers in the door!

Market approach

The market approach, as the name implies, relies on signs from the real market place to determine what a business is worth. Here, the so-called economic principle of competition applies:

What are other businesses worth that are similar to my business?

No business operates in a vacuum. If what you do is really great then chances are there are others doing the same or similar things. If you are looking to buy a business, you decide what type of business you are interested in and then look around to see what the “going rate” is for businesses of this type.

If you are planning to sell your business, you will check the market to see what similar businesses sell for.

It is intuitive to think that the “market” will settle to some idea of business price equilibrium – something that the buyers will be willing to pay and the sellers willing to accept. That’s what is known as the fair market value:

The business price that a willing buyer will pay, and a willing seller will accept for the business. Both parties are assumed to act in full knowledge of all the relevant facts, and neither being under compulsion to conclude the sale.

So the market approach to valuing a business is a great way to determine its fair market value – a monetary value likely to be exchanged in an arms-length transaction, when the buyer and seller act in their best interest. Market data is great if you need to support your offer or asking price – after all, if the “going rate” is this much, why would you offer more or accept less?

Income approach

The income approach takes a look at the core reason for running a business – making money. Here the so-called economic principle of expectation applies:

If I invest time, money and effort into business ownership, what economic benefits and when will it provide me?

Notice the future expectation of economic benefit in the above sentence. Since the money is not in the bank yet, there is some measure of risk – of not receiving all or part of it when you expect it. So, in addition to figuring out what kind of money the business is likely to bring, the income valuation approach also factors in the risk.

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.

The Five Step Ladder to Determine Business Value

Business valuation could be a method that follows variety of key steps beginning with the definition of the task at hand and resulting in the worth conclusion.
5 step ladder to business valuation success
The 5 steps are:

1. Designing and preparation

2. Adjusting the money statements

3. Selecting the valuation ways

4. Applying the chosen valuation ways

5. Reaching the business worth conclusion

 

Step 1: Designing and preparation

Just as running a thriving business takes designing and disciplined effort, effective valuation needs organization and a focus to detail. The 2 key beginning points toward establishing your business value are: • Determining why you wish business valuation • Assembling all the desired data. It may appear shocking initially that the valuation results area unit influenced by your would like for valuation. Is not business worth absolute? Not very. Business valuation could be a method of activity business value. And this method depends on 2 key elements: however you live business worth and below what circumstances.

 

Step 2:Adjusting the historical money statements

Business valuation is essentially AN economic analysis exercise. Not astonishingly, the corporate money data provides key inputs into the method. The 2 main money statements you wish for valuation area unit the earnings report and therefore the record. to try to a correct job of valuing a little business, you ought to have 3-5 years of historic financial gain statements and balance sheets out there. Many tiny business homeowners manage their businesses to scale back rateable financial gain. Nevertheless once it involves valuing the business, AN correct demonstration of the complete earning potential is crucial. Since business homeowners have extensive discretion in however they use the assets further as what financial gain and expenses they acknowledge, the corporate historical money statements may have to be recast or adjusted.

 

Step 3: Selecting the valuation ways

Once your knowledge is ready, it’s time to settle on the valuation procedures. Since there are a unit variety of well-established ways to work out worth, it’s a decent plan to use many of them to see to it your results. All acknowledged valuation ways represent one or a lot of those elementary approaches: • Asset approach • Market approach • Income approach

 

Step 4: Range crunching: applying the chosen valuation ways

With the relevant knowledge assembled and your selections of the business valuation ways created, shrewd your business worth ought to manufacture correct and simply excusable results. One reason to use many business valuation ways is to see to it your assumptions. For instance, if one business valuation methodology produces astonishingly completely different results, you may review the inputs and think about if something has been not noted.

 

Step 5: Reaching the worth conclusion

Finally, with the results from the chosen valuation ways out there, you’ll create the choice of what the business is value. This can be known as the business worth synthesis. Since nobody valuation methodology provides the definitive answer, you’ll conceive to use many results from the varied ways to create your opinion of what the business is value. Since the varied valuation ways you have got chosen could manufacture somewhat completely different results, closing the worth needs that these variations be reconciled. Business valuation consultants typically use a weight theme to derive the business worth conclusion. The weights assigned to the results of the business valuation ways serve to rank their relative importance in reaching the business worth estimate.

 

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.