Moorfields suggests five ways to value your business effectively
It is very important for some companies to ascertain the value of their business. Instances such as if they are planning to sell it to a larger entity, preparing the company for an initial public offering onto the stock market, or using it as a tool to motivate management.
Although a company may be able to quickly determine the value of different elements of the business, such as stock or fixed assets (land, machinery, equipment), a number of valuation techniques may need to be employed to calculate the overall value of the business, such as those outlined below:
This relates to the forecasted cost of setting up a business similar to the one that is on sale, including the cost of developing products and services, training/recruiting staff and building up the reputation of a brand.
Multiple of earnings
Multiple of earnings could be a suitable valuation option for businesses with a solid financial track record, demonstrated by the Price/Earnings (P/E) Ratio – the value of the business divided by its profits after tax.
A discounted cashflow valuation is used to determine the attractiveness of a business to potential investors, and analyses future-free cash flow projections, before discounting them to arrive at the current value.
This method may be most suited to those businesses which have a substantial amount of tangible assets, such as firms in the property sector, with the valuation based on the net realisable value of the combined assets.
Non-tangible assets such as key staff, the organisation’s reputation and trademark may also be included in this valuation. However, the value of these may be more difficult to determine.
This method uses a standard formula adopted within a particular sector, where buying and selling a business are commonplace, to arrive at the value of a business. Here industry rules of thumb would look at factors beyond profit, such as the number of outlets for an estate agency business.
If your business is in need of corporate advisory, you may want to seek professional advice.
If you would like to have a free no obligation chat with one of our advisers please call us on 0207 186 1143.