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 UK Business valuation services from Stirling Business Solutions
Businesses are all as different as the people who run them. They each have their own peculiarities and way of doing things. This makes it very different to compare any two businesses.
What we can do is consider how much each business is worth, or what someone would pay for it. This would then allow 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; it might be that someone is considering selling part or all of it, or that someone is interested in purchasing 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 almost as many reasons for wanting to know the value of a business, as there are businesses.
To add to the complications, there are 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.
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. A business only has a value because owning the business will give you a cash flow in the future. That cash flow normally comes from the profit of the business, so the value is directly related to the level of future profit that you expect to be able to take out of the business. As we are dealing with the future, there are uncertainties, so you should not assume that the profit will continue indefinitely. The multiplier assesses the risk of the business, and effectively gives you a number of years of future profitability, discounted to reflect the advantage of having the money now, rather than having to wait until the future profit actually becomes available.
The P:E multiplier used is traditionally based on similar businesses that are listed on the stock market, adjusted to reflect the difference between a listed company and the business being valued. Obviously the more differences there are, the less reliable this method becomes. For example if the business is not incorporated, the differences might be immense, but for most companies these can be overcome.
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 SMEs where the cost of obtaining the information might be prohibitive.
The value of a 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?
What you need is a quick and simple way of identifying which method should be used, and then the ability to use it, albeit roughly at first, to get an idea of the value of the business. An expert valuation company can be used, or an alternative is one of the self valuation packages on the market. Make sure that your choose one that deals with both "companies" and "unincorporated businesses" - even if yours is a "company" you might want to buy an "unincorporated Business" one day. Also choose one with spreadsheets and an explanation. That way, when a deal does move on and experts become involved, you can understand what they are talking about. Practical Business Valuation from Forum Business Media (020 8941 8589) would guide you through the maze.
Remember - a business is worth what someone will pay for it. Business Valuations are only there to help give an indication.
Adapted from an article by Tim Vogel BSC ACA MEWI who is a member of the UK's Insitute of Independent Business, and the author of Practical Business Valuation.
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