Business valuations

There are many reasons you may need to value your business. This guide considers the range of methods available, as well as some of the factors to consider during the process.

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There are various methods available to determine the value of a business. Whilst not an exact science, it calls for experience and judgement. Mitchell Associates can assist in valuing your business and crafting an exit strategy if you plan to sell.

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It is important to remember throughout that valuing a business is something of an art, albeit an art supported by science.

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Why Should You Need To Value Your Business?

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One of the most common reasons for valuing a business is when a sale is being considered. Planning the sale, and positioning your business for the most beneficial outcome, can require some time to refine and improve the aspects which will maximise the sale. It important therefore to understand the present -day value, compared with the potential value once everything is in place. An informal valuation may be required initially for this purpose ,and as  a starting point for negotiations.

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But apart from a potential sale, there are many other reasons why a valuation might be required:

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• The death of a shareholder
• The gifting or sale of shares
• For Capital Gains and/or Corporation Tax purposes
• The purchase of own shares (buy-back) by the company
• A requirement to do so under the Articles of Association, or Shareholders Agreement
• Financial settlements in a divorce
• Insolvency and/or bankruptcy matters
• To raise additional funding

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A Business Valuation can also help motivate your staff by providing management with performance evaluation criteria. This can be extended to valuations for share option schemes in order to inspire and reward employees.

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Valuation Methods

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Mitchell Associates specialise in the valuation of family owned and managed businesses. There are various methods available in this exercise, and we complete our review with an overall assessment of these methods. These are:-

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Balance Sheet

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The Balance Sheet historic values have been written-down over the years by depreciation, and represent their individual break-up values. However collectively, and on a going concern basis, they have a market value which could be considered greater by interested purchasers. It does not however take into account the future earnings  and potential of the business.

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Market Comparison

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A useful assessment of market value is the present market place activity. There are limitations on this method when trying to research exact comparables, and it can only be used as a guide.

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Adjusted EBITDA

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By reviewing and adjusting the most recent trading results we are able to assess the potential profitability. A multiplier is then applied depending upon the industry and other factors in order to assess a potential valuation. This method however, is not defined by accounting regulations, and by definition does not take into account individual variances attributable to the company itself.

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Return on Investment

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This is a simple ratio of the income guaranteed by an investment relative to its cost. It can be expressed as a % or  as the length of time taken to recover the original cost. A view can then be taken as to the return required when compared to the risk involved.

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Discounted Cash Flow(DCF)

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A DCF is based upon the estimated future cash flows generated. DCF analysis assess the present valuation of the future cash flows using a discount rate. Whilst the method is popular when assessing the larger public quoted companies, it is not considered appropriate for smaller private companies.

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What Other Factors should be Considered during the Valuation Process?

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• Growth Potential. A Valuable business often boasts strong growth potential, making it highly appealing to potential buyers. Market conditions and how a business is adapting to these are important. Buyers will be seeking a faster return on their investment on a business that is experiencing growth.
• Dependencies. A business which demonstrates that it is not dependent upon any one in-house individual, or any one supplier or customer is obviously more attractive to a potential purchaser. Systems within the business need to demonstrate that they are robust, and not dependent upon any individual. A period spent refining these systems prior to going to market is often time productively spent.
• External Influences. External factors such as the overall state of the economy, and political influences can impact on valuations. Additionally the number of potential  interested buyers may have a significant influence. Conversely, external factors such as a forced sale, perhaps due to ill-health or death might require a quick sale, leading to the need to consider lower offers.
• Intangible Assets. Evaluating the value of customer testimonials, branding, goodwill, licenses. These may not appear on the Balance Sheet, but will inevitably play a part in assessing a company’s worth.

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How Can we Help?

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When assessing a business’ valuation all of the above factors need to be taken into consideration. It is worth emphasising that the valuing of a business is not an exact science, and inevitably there will be an element of negotiating before the final figure can be agreed. At the end of the day the valuation of a business will be based upon two parties agreeing what they are willing to accept and pay for it.

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Mitchell Associates are well versed and experienced in valuing family owned and managed businesses. We are able to explore how we can assist in valuing your business, and are happy to meet with you to explore the potential and opportunities.

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