VALUING YOUR BUSINESS

You shouldn’t understate the importance

of an objective and accurate valuation.

A professional valuation will ensure you

receive a fair price when exiting your business.

The valuation approach will depend on your

circumstances and requirements.

Your Business Valuation

Simply put, a valuation will consider your business’ assets, cash flow and ability to make money. But before considering which valuation method is right for you, you should start getting your business prepared for the process.

Advanced preparation ahead of the valuation can help you to secure a higher figure.

Valuation Considerations

Knowing what buyers are looking for in a business can help you to prepare. Here are some things to consider:

// Security of future income streams.

Typically, this applies to businesses that have strong visibility of future earnings. For example, robust order books and large contract volumes earn higher multiples.

// Stable earnings profile.

Companies that have an unstable earnings profile are seen as riskier. This is because future earning streams can’t be predicted easily.

// Growth prospects and strategic fit opportunities.

Businesses with strong growth prospects offer greater potential to buyers and therefore will attract higher offers.

// A buoyant or growing markets.

Businesses in buoyant or growing markets deliver higher earnings multiples due to growing levels of customer demand.

Once you’ve prepared your business ahead of time, you can then consider which valuation method is right for your business and circumstances.

There are 3 methods of valuation commonly used:

When it comes to valuing your business, no one method fits all. The method you choose will depend on your business’ unique circumstances.

The earnings method considers how much money a business is making, has made, and is predicted to make in the future. Adjustments are usually made to factor in any unusual or oneoff costs.

Profitable businesses with a stable and generative cash flow will benefit from this method. A number of factors such as Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) and Multiples of Earnings (MOE) are considered to reach a final equity value. This is the value that is used by most buyers when deciding on how much they’re willing to pay for your business.

You can reach an equity value in four steps:

The first step is to consider your earnings through the lens of EBITDA¹. Adjustments are then made for any one-off costs.
Then a multiplier based on a number of factors (such as industry, size, stage of business, and economic conditions) is applied. The multiplier is often derived from market research carried out by corporate finance professionals.
Then, using both the EBITDA criteria and a multiplier, an enterprise value² is calculated. This is known as the Multiples of Earnings (MOE) method³.
Once you have an enterprise value, you can adjust this figure based on your business’ earnings, debt and working capital. The following items tend to be reviewed for this adjustment:

// Surplus cash (bank balance adjusted for working capital requirements)
// Company loans
// Hire purchase
// Transactions with Directors
// Corporation Tax
// Surplus working capital

This will result in the equity value⁴. This is the total value of your business.

The net asset basis method uncovers the underlying value of assets that your business owns, taking physical assets such as property, equipment, and inventory into consideration.

Asset-heavy businesses such as property development companies, where profits may be low in comparison to net assets, may benefit from this method.

Before using this method to value a business, all assets on the balance sheet should be re-valued. It may be helpful to use professionals who can support you with this, such as quantity surveyors. They can help you to reach a true value.

The cash flow method considers the money flowing through your business. It’s all about the ability to generate a healthy cash flow.

Considerations can be made for future cash flows too. Discounted Cash Flow (DCF) analysis⁵ is often used to calculate the value of a business based on future projections. Under this method, current investments are valued by forecasting how much they’re likely to generate in the future. DCF is used when a business isn’t currently making money or is loss-making.

Due to the nature of forecasting and estimation, the cash flow method (including DCF) can be the most subjective means of valuation. Start-ups that are yet to make money could benefit from cash flow valuation.