Knowing the value of your business is incredibly insightful, whether you want a clearer view of your financial health, wish to impress investors or are looking to sell, knowing the worth of your company makes all the difference. But how do you calculate the value of a business?
At Rayner Essex, our business valuation services provide you with an independent valuation on either your business or another business you’re looking to acquire. This helps everyone involved make informed decisions.
What is a company valuation?
A company valuation is the act of calculating the financial value of a business at a certain point in time. Obviously, this valuation may change in weeks and months. During the valuation process, the material aspects of the business are evaluated to determine its worth. Valuing your business can be used to determine a fair independent value of the company, for when you wish to sell, gain a partner or even purchase another business.
Some key reasons why you should consider getting a company valuation include:
- You’re selling your business or buying another company and want an independent view of its value
- You wish to secure additional funding from investors and they require a formal valuation to be carried out
- It allows you to gain a clear understanding of the financial position of your company, identifying areas to improve
- If your staff wish to buy or sell shares in the company, a business valuation allows you to set a fair price
What information do I need to provide to obtain a valuation?
If you wish to obtain a business valuation, you’ll need to provide enough information for an accurate valuation to be reached. Here’s some key information you’ll need to have:
- Full statutory accounts for the past 3 years
- Latest set of management accounts with a comparison to last year
- A schedule of the company’s fixed and intangible assets
- An estimate of the value of your company’s current stock or work in progress
- A customer list and details of any long-term sales contracts
- Details of the company’s financial and capital commitments
What affects a business valuation?
There are several different factors that can impact the value of a business, with almost endless unique circumstances that will change the valuation, here are some key things to consider:
- Situation leading to the valuation – for example, if you’re selling the business voluntarily or by force
- Business age – whether your business is well-established or a start-up
- Business reputation – companies with a strong reputation will likely have a higher valuation
- Customers – the value of a business’s customers impacts the overall value
- The team – if a business’s management team have a strong track record and wishes to stay with the company, this can have a positive impact on the value
- Financial record – detailed and positive financial records help to improve valuations
- Business industry – the general performance of the industry a business is in will also impact the valuation alongside the overall economy
- Assets – the total value of assets your business owns will also contribute to its value
What are the different company valuation methods?
There isn’t one set way of working out a company valuation, however, there are various methods that can be used to uncover a business’s value, depending on the type of business and information available.
Price to earnings ratio (P/E)
This is the most frequently used method of valuing a controlling interest in an entity and the use of this method has generally been well supported by the courts. The price: earnings ratio is used to assess a value which represents the number of years’ earnings (assuming a constant level of profitability) it would take the shares to earn an amount equal in money terms to their current price.
This is a simple method of working out a business valuation – how much would it cost to set up a similar business from scratch?
Costs to consider include employing people, training staff, developing the product/services, building assets, obtaining clients, marketing and more. The final figure is a valuation of the business.
If you’re a sizeable business with many tangible assets, then valuing your assets can be a good indicator of overall company value. These tangible assets could be anything from land, buildings, equipment and inventory. To work out the net worth of your business you need to establish the current worth of your assets, you need to calculate your assets minus the company’s liabilities. Intangible assets such as the company’s brand, trademarks and patents will also need to be considered.
Discounted cash flow
Discounted cash flow calculates what your future cash flow would be worth today. This is suited to mature businesses that have stable and predictable cash flows. The complex formula values businesses based on the assumption that £1 today buys more than £1 tomorrow, because of inflation.
Industry rules of thumb
As buying and selling businesses works differently in different industries, your field may have unique rules of thumb when it comes to selling, other than profits. For example, retail businesses may look at things such as reputation and the number of customers. This can add further value to your business valuation.
How long does a business valuation take?
The length of time it takes to reach a business valuation largely depends on the methods used and the type or size of the business. This can take anywhere from 2 to 4 weeks depending on your unique circumstances. It’s always best to meet with an expert valuation team as they can get to know your business and industry better to make an accurate assessment.
What can I expect from a business valuation?
In order to be prepared for a business valuation, you must make sure all of your financial documents are in order and up to date. It’s important to understand that a business valuation only applies to this point in time and can’t be used in years to come. Your expert team will meet with you to discuss your business and gain as much information as possible to provide you with a truly accurate valuation.
Business valuations aren’t just for when you’re selling or buying a business, they can be incredibly valuable to understand where your business currently stands financially. At Rayner Essex, we’re experts in various industries, working with clients of all kinds of businesses. This allows us to understand your industry and unique business needs, so you can rely on our team to provide you with an expert business valuation.
Get in touch
To find out more about company valuations or to determine how much your business is worth and how to mitigate financial risks and plan your strategy when selling a business or expanding, get in touch with our business valuation experts who will be happy to discuss your business requirements.
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