Valuing a Small Business in the UK – What You Need to Know
In addition to the figure on the balance sheet including the tangible assets, such as equipment and machinery, there are the business' intangibles - or perceived value - which might include factors such as branding and strength of client relationships.
There are several reasons why business owners might need their business valued:
In the case of sale preparation, determining a realistic price should be the first step. Buyers are rarely sentimental, so it’s important to be pragmatic - owners should not start out expecting their business to sell for an inflated price, but likewise should not let a business go for less than it’s worth.
Larger companies, including those quoted on the London Stock Exchange, can be valued simply using the Price/Earnings (P/E) ratio, which represents the value of the business divided by its post-tax profits.
Earnings Multiples
For small trading businesses in most industries, however, the appropriate initial approach is applying an Earnings Multiples – a multiple of surplus, adjusted net profits or adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) to calculate the trading value i.e. before consideration of the its liquidity position, investments, excess assets or net debt.
Net Asset Valuation
Another way to value a small business is through a net asset valuation. This method is often appropriate for strong, stable businesses with plenty of physical assets (property and manufacturing businesses are good examples). Asset valuation can result in the lowest assessment of a business and, for small trading businesses, a net asset approach may not represent fair value.
Discounted Cash Flow
Although more typically used for investment into larger organisations or significant asset acquisition, a discounted cash flow methodology can be appropriate for valuations in connection with growth shares and freezer shares - especially for established businesses with predictable cash flows, such as energy companies.
To establish the value of a small business through discounted cash flow, the valuer will estimate today’s value of future cash flows. The assessment considers risk and the time value of cash. In short, time value is based around today’s pound having more value than tomorrow’s, owing to its earning potential. The discount interest rate tends to vary between 15 and 25 percent, though each assessment is reviewed on a unique basis.
In some sectors – such as where there are high volumes of business acquisition and disposal - it can be appropriate to assess a business based on industry rules of thumb.
We are happy to explain the process and what you would need to provide, so why not phone the office on 01425 402 402.
An expert business valuation supported by a professionally prepared Valuation Report from an independent and authoritative source is an essential aid for:
Valuation Reports produced by R A Valuation Services Ltd are bespoke and geared to each client’s individual circumstances and requirements; they are definitive and realistic in the market place. As we are recognised as expert witnesses for supplying Valuation Reports to UK courts and HMRC queries/challenges, we are acknowledged to be the authoritative business valuer by:
R A Valuation Services' Valuation Reports are tailor-made for their purposes, definitive and realistic in the market place. Indeed, such is their authority that an R A Valuation Services' Valuation Report is normally insisted upon in support of negotiations.