Insights from

Investigating value

Investigating value

An Insight into: What are your assets worth?

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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