Ever wondered what your assets are worth?
There are many websites that can tell you what your house might be worth, or you can ask a local estate agent, but how would your business be valued? What different valuation methodologies are used?
The main techniques used to value owner-managed small and medium-sized enterprises (SMEs) include:
- Discounted cashflow
- Capitalisation of profits
- Relative valuation
- Asset based valuation
- Dividend yield
There is no magic formula used to value a business: valuations rely upon the professional expertise and judgement of the valuer and it’s often said that it’s an art not a science. Line up three “experts” and you might receive three very different valuations.
Valuations of businesses could be undertaken for commercial or fiscal reasons. A fiscal valuation is a determination of the value of a business at a point of time so that any resultant taxation can be agreed with the tax authorities.
Reasons for undertaking commercial valuations could include:
- Valuing the stake in a business for a stakeholder joining or leaving the business
- Aiding potential vendors of businesses to understand likely sales proceeds
- Assisting acquirers of businesses in structuring an appropriate package with which to buy a business
- Assisting Courts in appropriating assets in the event of divorce
- Probate valuations
It is crucial to remember that the price of any asset is determined by the marketplace. Therefore any valuation placed upon a business may not necessarily correspond to the actual price for which that business may eventually change hands on a sale. This could be because the buying party is willing to pay a premium, perhaps to secure a particular customer. Alternatively, the seller may be willing to sell at a discount to facilitate a quicker transaction.
In the world of corporate finance, it is generally the market value that is of interest, not a desk based financial calculation. So to understand the true value of your business on a sale, speak to an M&A expert who spends their working life helping people to buy and sell companies.