How do you value your company?

Determining the value of a business is a specialised process, taking into account a range of factors from assets to reputation. It can also be very personal, putting a number on the work, time and passion put in by the business owner(s) over the history of the company.

Kapil Davda explains the key points that determine value, how valuation can affect your future plans, as well as the steps business owners can take to increase their valuation.

What is a business valuation?

A business valuation is the process of assessing how much a company is worth at the current market rate. While the most obvious need for a business valuation is selling or passing on the company, there are a range of circumstances where it’s necessary to know how much the company is currently worth:

• Sale and succession planning: In order to sell or pass on a business to new owners, it’s first necessary to determine a fair price for the buyers and seller. In this circumstance, a formal valuation will often be the first step in a negotiation, which can go up or down depending on market conditions and how many bidders there are for a business.

• Distributing shares: Share schemes, such as Enterprise Management Incentives (EMIs) or a share freezing scheme, are usually based on a value of shares, often linked to revenue or salary. In this instance, a business valuation allows you to work out what individual shares are worth.

• Obtaining insurance: When valuing assets or taking out a keyman policy, for a director for example, a business valuation will set the value of the policy and the rate of the premiums.

• Restructuring the business: In the event of creating new structures for the business, whether due to a change in plans or even shareholder disputes, a valuation can set the rate for a buyout or a distribution of assets.

How do you value a business?

The method of valuation depends on the type of business. Different kinds of organisations generate value in varying ways, which a valuation takes into account.

Some of the most common methods include:

Valuation based on assets

For a company that holds and generates revenue primarily from assets, such as a property management business that buys and sells buildings, valuation will be based largely on their balance sheet.

This will start with working out the Net Book Value (NBV) of the business using the assets recorded in the company’s accounts, then assessing the future value of these assets based on current market trends and management conditions.

Multiples of income

For businesses where revenue comes from the provision of service or products, it’s more common to use a multiple of the revenue generated. There are a few ways to assess and segment income for valuation, but the common examples include:

• Turnover: this method focuses solely on revenue generated, though doesn’t take into account operational efficiency, or ongoing costs and investments. This is more suited for simply-structured or newer businesses.

• Profit/earnings ratio: for businesses with an established track record of profits, their value would depend on the amount of profit generated annually, with a multiple applied based on their current market conditions, the quality of the management and their future growth. The exact method will depend on the company. A business that has generated steady profits will be valued with a lower multiple than, say, a high-growth technology business that is predicted to increase profit rapidly.

What are the key factors that influence value?

There are a range of factors that affect the value of a business, some of which are less tangible than others. Tangible factors include:

• The monetary value of the assets in the business.

• Value of existing contracts along with their terms and timeframes, as well trademarks.

• Turnover, profit margins and growth rates.

• The age and future earning potential of the business.

Intangible assets can also play a large role in determining value due to their effect on the future potential of the tangible assets and metrics, such as:

• Quality of management team and their perceived ability to continue generating results

• Quality of customers, with their perceived ability to remain solvent and honour their commitments. Blue Chip customers, for example, command a premium.

• Businesses working in a prime location or popular sector command higher prices, as well as those with a highly differentiated or hard to copy product.

• Proven track record of investment in research and development and bringing new products and services to market.

• The business reputation.

How to raise the value of a business

While business valuation can be an unpredictable process, business owners can improve their prospects by focusing on building processes and teams that generate long term value. In the event of a sale, it’s essential to consider these factors well in advance of the time you wish to leave the business as some can take significant time to implement.

• Create a strong management team, along with provisions to keep them in the business such as EMI schemes.

• Create a reliable management system that can be easily taken on by a buyer, including a library of key documents such as contracts, processes, supplier histories and employee management files.

• Improve your compliance track record with audits and general taxation including PAYE & VAT.

• Building a positive brand reputation via third party reviews, awards and online profiles.

• Use targeted customer acquisition to boost revenue.

• Improve long term efficiency to boost profit through investment in technology or key hires.

How does selling a business work?

While the first step in selling a business is determining its value, it’s important to remember that a company is only worth what a buyer is willing to pay for it. A valuation gives you a benchmark to judge offers and manage your route to market.

For a planned exit, such as a management buyout or an independent sale, the business will go through a formal valuation and then be either marketed by a corporate finance house or presented to the buyout team. Once the business is valued, based on current market conditions, there will often be a negotiation period, leading most businesses to be marketed slightly above initial valuation.

Getting the best valuation for your business

Valuation is a key moment for determining the future of your business. Working with the right advisor can help you stay on track before, during and after the process, acting as a sounding board, helping you to avoid common issues and building long term value-driving business processes.

Get in touch with one of our experts to talk through how you can ensure you get the best results for your High Wycombe-based business.