Business Valuation: The Key To Getting It Right - Hilton Smythe

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Business Valuation: The Key To Getting It Right

The valuation of a business is a process many entrepreneurs will encounter throughout their career.

The goal of a valuation is simple: to estimate the economic value of a business.

There are countless reasons why somebody may value a business, from purchase and sale to tax and shares. 

Value your business accurately and you can confidently pitch to investors to secure funding. However, receive an inflated valuation and prepare to be told where to go! 

This is why it is so crucial to use professional valuers when it is time to value your business!

Below, we will take you through key information that you need to know when it comes to getting an accurate valuation.

What are the benefits of valuing a business?

So, let’s start with some benefits that drive people to get their business valued. 

Valuing a business can be important for not only understanding a businesses’ potential value but can also be used as an effective business leading indicator and management tool. 

Particularly for those companies’ which are preparing to sell, an indicator aimed at building value is particularly useful in driving additional money on the sale. 

Many business owners get their business valued to get an accurate insight into their companies assets.

An accurate business valuation allows owners to understand how much to reinvest in their company or how much to sell it for in order to be profitable.

Before a business goes up for sale, it is crucial for the owner to know it’s true value. If the business owner knows the true value well in advance, they have the chance to increase it and potentially achieve a sales higher price, before it goes on the market.

The benefits don’t stop there though. 

Another huge advantage of having a business valuation is to secure funding from investors. 

Not only will potential investors want to see a full valuation report, but employees looking to buy shares in the company will also need to know how much the business is worth. 

Can you value a business on turnover?

It’s a question many people ask. 

There are many suggestions on the internet and searched questions around valuing a business on turnover.

Whilst there are some sectors and industries that value a business based on turnover, it is not appropriate for the vast majority. 

Whilst you can arguably obtain a rough idea as to the value of the business using the turnover, it will never be entirely accurate. 

Such methods make too many assumptions as to the cost base of businesses and so can never be wholly relied upon. 

However it can, if a business fits within an expected cost profile, provide an indication.

What information do you need to value a business?

For the most part, the trading accounts of a company are essential to derive the value of any business. 

A buyer is going to look at the profitability of the business, firstly. 

They are then likely to assess the balance sheet for value, usually against which they might secure funding. 

Assessing the operation of a business may also be a key source of information for a buyer, together with details on staff skills and ability. 

What exact information is required to value a business will be sector-specific but for the most part, three years profit and loss along with the balance sheet will be required together with any projections for the future if available. 

What are the best types of valuation methods for small businesses?

P/E Ratio

SME’s are invariably valued using a multiple of profits e.g. a P/E ratio. A P/E ratio is the profit to earnings ratio. 

In other words, at what rate is an investment repaid through earnings. 

For example, if you buy a business for £100,000 and it returns £25,000 a year profit, the P/E ratio is 4. 

This type of valuation is very common amongst businesses that have high profits.

P/E ratio’s can vary for each business, however, a ratio between four and ten tend to be the typical range for businesses.

Asset Valuations

Other methods include asset valuations. Asset valuations can work extremely well for stable businesses that have a good amount of physical assets. 

Establishing a businesses Net Book Value is a fundamental part of the asset valuation. The Net Book Value of a business is the value of the business’s assets, minus their liabilities.

It’s important to note, when measuring the value of a company’s assets, you will need to take into account potential economic factors which may affect an asset’s value. 

If you’re looking at a business’s accounts, you need to consider that they may not take inflation, appreciation or depreciation into account. 

Discounted Cash Flow

The third most common method to value a business is DCF or discounted cash flow.

Valuing a business by discounted cash flow involves estimating a business based on its future cash flows. A discounted cash flow analysis will find the present value of expected future cash flows, using a discount rate. 

While this may be common in larger companies, for SME’s, using this type of valuation method is rare.  

What factors affect business valuation?

There are many factors that have the potential to affect a business’s value. 

For example, location can prove integral or detrimental to a company’s success. 

Great customer access and a well designed premise can easily increase your business valuation. Whereas, poor location and access could result in you receiving a lower valuation.

Industry growth is another factor that may affect your business valuation. Companies that are in rapidly growing industries are much more valuable as a whole due to the market demands. 

Along with industry growth, a business’s earnings growth can determine how valuable they are. If your business has an impressive earnings growth track record then expect your valuation to be higher.

The other common factors that can apply to most businesses are profitability, market advantage, established processes and procedures, intellectual property, access to key customers, reputation, market share, competitive environment and customer concentration. 

What is the entrepreneur’s relief and how can you benefit from it?

Entrepreneurs relief (ER) is a tax relief that the seller of a business can benefit from on sale. 

In essence, the rate of capital gains tax, that is the tax paid on any gain from the sale of a business, is reduced to a flat rate of 10%. 

This has a lifetime limit of £10M per person and there are certain rules that must be applied to ensure you qualify, such as the percentage of the business you own and the time you have owned that percentage. 

ER only applies to individual sellers, i.e. the seller of the shares in a limited company or a sole trader or partnership selling their business; it does not apply to corporate sellers i.e. companies selling its assets. 

How can I value my business?

In order to get an accurate, reliable business valuation, it is crucial to work with an experienced valuer.

An unrealistic business valuation can deter away potential investors and frankly, leave you looking unprofessional. Or even worse, you could sell it for much less than it’s actually worth!! 

If you are thinking about valuing your business, Hilton Smythe offers a FREE Business Valuation.

How much could you achieve by selling up?

Hilton Smythe’s FREE valuation service is designed to give you all the information you need when considering selling a business, and it’s absolutely FREE.

Find out the fruits of your labour with a market appraisal from a professional Hilton Smythe regional valuer. 

Once you know how much your business is worth, you can make an informed decision as to whether now is the right time to sell.

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    *Completions figure is comparable to K3 Capital PLC from 2017. Data based on our nearest competitor k3 Capital PLC, results in 2018 against comparable period.

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