Why Value your Company?

One of the first steps when considering buying out a shareholder is to undertake a valuation of the company.  

There are two main reasons for this:

1. Establishing a fair market price to pay for the shares of the exiting shareholder
2. Ensuring HMRC are comfortable that you are paying a market rate for tax purposes, so as to avoid unwanted tax consequences

To give all parties confidence and certainty we recommend a detailed, independent professional valuation is undertaken.

What will a Professional Valuation Include?A professional valuation should include the following:

• A summary of adjusted historical revenues and earnings for the past 5 years
• Projections of current year and, where relevant, future years’ financial performance
• Analysis of relevant market data, adjusted for size, so as to determine a fair price for your company
• Comparison of relevant valuation methods
• A full report setting out the valuer’s analysis of factors relevant to your company’s value, and their reasoning in how they have arrived at a value for your company
   

What Key Factors Influence Valuation?A company’s value is affected by a large number of factors, both external and internal.  Some of the key ones are listed as follows:

• Earnings history – this is the single most important factor in valuing any established company.  A history of stable and increasing earnings will lead to a higher valuation than poor or erratic performance.
• Growth – strong and consistent growth will result in a higher earnings multiple for your company as a buyer can expect to realise returns quicker.
• Size – larger companies tend to realise higher earnings multiples than smaller companies.
• Owner dependence – the more dependent your company is on you as an owner, the harder it is for someone else to successfully buy and operate without you.  Freeing up yourself from the business will increase its value.
   

What are the Most Common Valuation Methods?Valuation methods will vary between valuers and between countries, or between companies.  Some of the most common methods are as follows:

• Historical earnings-multiple – normalising historical earnings and applying a multiple of earnings to arrive at Enterprise Value.
• Revenue multiple – more suited to loss-making companies, this method applies an appropriate multiple to top line revenues to arrive at Enterprise Value.
• Net asset valuation – this method is more suited to non-trading companies or asset-stripping scenarios where there is no going concern; in this scenario the company value will be arrived at by assessing the realisable value of each of the assets on the balance sheet.
• Discounted cash flow – this is an appropriate method particularly for larger businesses or those with very stable subscription or contract-based revenues where future cash flows can be predicted with a high degree of certainty, and discounted to present value.

As discussed in this article there are various methods and factors to consider when it comes to business valuation. It is always best to seek professional advice.  For more information on how we can help you and your business, please contact us at   info@oldfieldadvisory.com or call 02476673160 for support and advice. Let’s work together to grow and strengthen your business.

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Please note: This article is provided for information only and was correct as at time of writing (30/05/23). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.