If a business owner is planning to value his / her company it becomes imperative to correctly estimate the value of a business. Valuation is helpful for completing bank formalities and can also come handy if a business owner looks to expand his / her business or maybe looking for organic / inorganic growth. In case a business owner plans to sell his / her business, valuation of a business helps them to derive the expected value of acquisition
Company or business evaluation is a process and a set of procedures which is used to estimate its economic value in the market. So, if you are looking for the valuation of your company, then either you are interested in selling it off or may be looking for investors who can invest in your business for its further growth.
Irrespective of your reason for valuing your business or company, it is important to use correct methods for the estimation to have an accurate estimation of its value. Because in case you are interested in selling your company or business, you should be clear about the price/value you can expect from a prospective buyer and in case you are out for exploring investment avenues, you need to know the correct value of your business for investors to show interest in it.
Valuation of a company or business is not a matter of somebody's opinion or conjecture because in reality, it is of any worth/value, only when either there is a genuine buyer for it or there is/are investor(s) who are ready to invest in it and the price paid by the buyer or the amount of money invested by the investor is the correct value of your company on that day.
Business Valuation in UK
While evaluating your business or your company, you have to factor various points which can have an influence on its value, like:
Company Value Assessment
The business value is an 'expected price' at which the business will be acquired or sold. The following business valuation methods are used most commonly:
How to Evaluate Your Company Worth
There are a number of methods through which you can evaluate your company’s net worth/ value; however there are three main approaches to valuing a business, which are:
Examples of tangible assets are: Equipments, Inventory, Cash, Investments, buildings, raw materials, spare parts etc.
Examples of intangible assets are: Goodwill, trademark, patent, logos, company name etc.
Liabilities include debts, outstanding taxes, mortgages, loans, leases, contracts etc.
The starting point for an asset/liabilities based method is to have a look at the assets which are listed in the company’s account book, also known as Net Book Value (NBV) of your business. To have a better introduction with the economic reality, you have to refine the NBV figures by adding liabilities to it.
In simpler words, add all the assets of your business and subtract the liabilities from it to have an asset valuation. So, in case your company has assets of £500,000 and liabilities of £150,000 then the asset valuation of your business is £350,000.
For example, if you need £500,000 to buy the set-up equipment and £50,000 for overheads on monthly basis and require 12 months to set up your customer base. In this case, your company is already at a value of at least £1.1 million i.e. £500,000 + £50,000* 12.
For example, if a hardware manufacturing business has 10,000 or more contracts but no profits. For one buyer, this could be of lesser interest as compared to another buyer who would like to purchase the business by paying £100 per share.
P/E ratio = Value of Business/Its profit after tax. So, you can use it to estimate value of your company i.e.
Value of Business = P/E Ratio * Earnings after tax.
For example, if a company has a share price of £50 per share and earnings per share after tax is £10. In this case, P/E ratio would be: £50/£10 = £5.
Many a times, multiples of earnings is used as a business valuation method. This method is best suited for businesses or companies with a time-honoured financial history. Under this method, the Price/Earnings (P/E) Ratio corresponds to the value of the business divided by its net income after tax. For example, if a business had net income after tax of £100,000 and the business was offered £500,000 for it, then the P/E ratio will be equivalent to 5 (£500,000/£100,000). Businesses within certain industry sectors, such as technology and information technology (also referred to as TMT (Technology, Media, and Telecommunications) will naturally have a much higher P/E ratio than a real estate business such as an estate agency. It must to noted that this method is usually used by businesses with a track record of profitability
While computing the value of a business, usually a combination of valuation methods is used to arrive at a correct picture. Apart from the above mentioned methods of valuation, there are also a large number of additional factors which may impact the buyers decision (these factors are mostly intangible in nature)
The economic climate plays a very important role in the performance of a business (for example, BREXIT at present). A buyer’s decision can be influenced to the economic climate and he / she must more careful when buying a business during an economic downturn. On the contrary, where the economic conditions are stable and the business is flourishing, organisations think of expansion and growing their footprint. Under these stable economic conditions, usually there are more potential buyers in the market, and a buyer is likely to get a higher price when the economy is booming
Valuation of assets can be done by using the original purchase price and subtracting the depreciated value using a depreciation calculation on each item. However, even after depreciation deduction, many business assets such as specialist equipments and vehicles may be worth a lot less if a person tried to sell them into the local market
Some of the most important parts of a business may not show on a balance sheet – these may include key people (workforce); business reputation; trademarks; and the size and quality of the customer base
For a buyer, it is imperative to understand the reason of sale. If it is a need-based sale or the sale is forced, any valuation methods are going to be discounted to support a quick sale. Businesses can discuss with DNS Accountants to understand how to approach a particular situation
Irrespective of the method you are opting for business valuation,it is important to keep emotion out of valuation process. Getting a correct value of your business is important for you to attract genuine investors or for selling it to a genuine buyer.
There are various ways through which you can reach a correct value of your business:
Company or Business Valuation by DNS Accountant
We at DNS Accountants, have experts to help you with right business valuation. To determine the most accurate value for a business, our experts at DNS Accountants help you with complete evaluation i.e. all of its assets, liabilities; future potential, current profits, etc. Contact today or drop us a line, we'd love to help you.
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