How much is your business worth? If you are contemplating selling your company, acquiring a business or raising finance, it’s the most important of all questions to answer.
The business advisory team at Dyke Yaxley Chartered Accountants, in Shrewsbury and Telford, says a valuation is multi-faceted, and various aspects inform value including income types, profitability, capital assets, business operations and the market itself.
Sarah Hartshorn, advisory associate at Dyke Yaxley, said: “Businesses are often valued on an earnings basis, using a multiple of profits. This involves calculating the level of future maintainable earnings that a buyer may expect from the business.
“To arrive at future maintainable earnings, there may be adjustments to profits for things such as market rate remuneration of directors, commercial rent charges on property, and removing any exceptional or non-recurring items. An appropriate multiple is then applied to arrive at the Enterprise Value of the business.
“To calculate the Equity Value of the company shares there will then be further adjustments for debt, cash, and surplus assets.
“Aspects that will influence the valuation include whether the business income is contractual or non-recurring, consistency of maintainable earnings and market position. We will also consider special arrangements with customers and suppliers, the quality of the management team, as well as the reputation of your brand, intellectual property which you may own or control, and reasons for wanting to sell, or raise funds.
“Other factors considered by acquirers may involve future maintainable earnings from potential synergies, replacement management costs and future growth opportunities. These will be specific to each acquirer but our team will be there to help when assessing these factors.
“Some buyers may be prepared to pay a premium if they view your company as a competitor, or due diligence findings on a transaction may also lead to downward adjustments in value.
“Some valuations may be based on the net assets of a business, depending on what you are valuing. In most cases this does not take in to accounts the potential future earnings of those assets."
Sarah said there were many factors to consider when it comes to valuing your business but current and future profitability was usually the starting point.
“Economic fluctuations will have a big impact too, and may steer the appetites of buyers and the sectors in which they prefer to invest, all of which having an impact of deal volume and multiples.”
