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Small businesses and companies are all as different as the people who run and work in them. They each have their own peculiarities and way of doing things. This makes it very different to compare any two businesses and to say that one is worth more than the other. What we have to do is consider how much each business is worth, or rather what someone would pay for it. This then allows us to compare any two businesses. Obviously, there are a number of other reasons why you might want to carry out a valuation of a business.
Why Have a Business Valuation
Why do people get their business valued?, it might be that someone is considering selling a business or part of it, or that someone is interested in purchasing it and that they need to know what they may get for it. It might be on the death of an owner, or for drawing up a will, or it might just be because the owner wants to know what he or she is worth. There are a large number of reasons for wanting to know the value of a company or business.
How do you Value a Business Then?
There are many complications here, there are for example a number of different methods of conducting a valuation of a business. P:E multipliers, discounted cash flows, dividend valuation methods and a host of other techniques can make business valuation a minefield for the uninitiated. Thus small business valuations need to be carried out in a scientific manner, and the “worth” of these valuations fully understood.
The starting point in choosing the appropriate method is that it depends on two main questions; “What sort of business is it?”, and “Why is it being valued?” Many of the potential methods are not applicable to certain types of business, and even where they are, the reason for the valuation might make them inappropriate.
Most business valuations in the UK are done using a P:E ratio/multiplier approach. This method looks at the profit of the business, and applies a multiplier to that figure. The idea behind the method is simple and is one way to value your business. The P:E multiplier used (an essential part of the calculation) is based on similar businesses adjusted to reflect the differences between the other company and the business being valued. Obviously the more differences there are, the less reliable this method becomes. The differences can be immense in some cases, but for most companies these can be overcome and thus one way that a business is valued is explained.
Discounted cash flow methods are great if you know the exact cash flows of the business in the future. The method is ideal when assessing one-off projects, but is harder to justify for most SME’s where the cost of obtaining the information might be prohibitive.
Company Valuations – The Least it can be
The value of a company or business will always be at least the value of the assets it owns, less the liabilities. Asset based business valuation methods use this approach, but they can not allow for the profitability of the business. We would hope that our business makes a profit, and is worth more than the sum of its parts, but at least that sum is a starting point. Indeed, for sole-traders and partnerships it might be the only method that is available. After all, why should someone pay you for a business, if they could go out – buy the assets more cheaply – and start up in competition?
Thus you can see, when valuing a business that here is a lot to consider, and selling a business takes even more planning and time. So if you are interested in obtaining a valuation then contact Stirling. As experienced business transfer agents we’ll see to it that you are aware of all the issues, directing you to take specialist advice as and when necessary:-
- You will need Tax advice if you are selling a business
- You will need legal advice on the contracts for selling a business
- You may need financial advice on how best to invest the sales proceeds
Whether buying or selling you can be sure that you will get the very best advice and service.
Stirling Business transfer agents / Brokers based in Shropshire (Midlands UK) and covering the nation.