How Do I Value My Business? An Expert’s Advice
How do you I value my business? We asked our
Business valuation and the related methodology is a topic which we Corporate Financiers are forever discussing with our clients, funders and often HMRC.
With vast amounts of commentary on the subject openly available online we often encounter business owners with a skewed view of how the different methodologies should be applied and how they differ according to the shape, complexion, maturity, sector and purpose of the target and transaction in hand.
Business valuation is an art – not a science
What is commonly accepted is that business valuation is an art rather than a science, and as such there is no definitive correct method to apply. This is often the reason why disagreement can often ensue between the parties involved in a transaction. This is also a reason why professional input will often deliver guidance which includes a valuation range.
Ahead of a transaction and a valuation process it is key to assess multiple facets, which include:
- What is the underlying profitability- i.e., the level of profit which the business could be expected to deliver year in year out?
- Given the proposed transaction in hand what costs or revenue may not be expected to continue and may require adjustment?
- How do the revenue streams work: are these contractual and recurring?
- How is the balance sheet comprised: what level of cash and debt exist and how does working capital usually appear? Do any assets sit below true net realisable value/cost?
The list of questions is numerous and following an “exceptional” period which may undoubtedly have seen distortion due to covid19, there is a lot to understand and assess, and where differing opinion could arise.
In terms of the application of methodology, further questions will then arise
Does the business use a profit multiple approach?
What type of profit figure and from what period is used?
Perhaps a revenue multiple approach is more reasonable given the contractual nature of the business?
For loss making and / or asset heavy businesses perhaps a net asset valuation is needed, and then you have other options which could include replacement cost, use of discounted cash flow methodology or even more niche and sector led approaches (for instance the application of a percentage versus assets under management).
In summary, there is a multitude of options and external input from a qualified professional can often be extremely useful. Inevitably, affordability is another key consideration depending on the transaction in mind and can be the hurdle which often cannot be surpassed if the initial assessment is proving to be inappropriate.
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