Investigating value

Written By Tom Gallop

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.

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