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This is a question many business owners would like to be answered. The truth is, it depends on a range of factors and any valuation is only useful as a guide for planning forward. The ultimate value of a business is the price a willing buyer is prepared to pay for it. 

The prevailing economic climate and state of a business’s sector can affect company valuation for better or worse, as can your reasons for selling. If you need a fast sale due to ill health, for instance, the value may be lower than if a sale was taking place under more favourable circumstances.

So, what are the most common methods of valuing a business?

Price to earnings ratio (P/E)

The price to earnings ratio uses multiples of profit, so may be an appropriate valuation method if you own a well-established business with a good track record of profits. ‘Price’ refers to the company’s current share price, and ‘earnings’ to the earnings per share (EPS). The P/E ratio indicates the business’s expected growth in earnings per share in the future.

Discounted cash flow

Discounted cash flow relies on estimating future cash flows for the company, and a residual business value, and may be suited to businesses with few assets.

Entry cost

Entry cost valuation involves calculating how much it would cost to build your business to the stage that it’s reached now, including start up and recruitment costs, marketing, and the value of assets. Any savings that could have been made should then be deducted to arrive at the valuation.

Asset valuation

The asset valuation method may be suitable if your business is well established and owns high levels of tangible assets. The Net Book Value (NBV) of assets is calculated, and then adjusted to take account of external factors such as depreciation and inflation.

Valuation based on industry

Some businesses are valued based on the industry in which they operate. The retail industry is one such example, where the number of outlets is an essential element for consideration. Industry ‘rules of thumb’ use factors specific to an industry and can provide a more accurate calculation in some cases.

Turnover basis

This method is used when a business has a high proportion of recurring income. In these cases, companies are usually valued as a factor of turnover eg. 1.1 x recurring sales. 

Other considerations when valuing your business

Intangible assets are a key factor when valuing a business. Intellectual property, goodwill, business reputation, and even a premium business location, can all add considerable value in the eyes of potential purchasers.

Spotlighting these intangible assets also allows you to improve their value where appropriate – for example, registering ownership of a trademark or patent, building up their reputation even further, or improving the condition of premises.

Further help

Please talk to us about valuing your business. We have significant experience in assisting companies of different sizes across a wide range of sectors.

About the Author

Paul Newbold Image

Paul Newbold

Partner
After qualifying with KPMG where he gained significant audit experience, Paul joined Torgersens in 1991 and became the firm’s audit partner in 2000. Paul employs his broad range of financial skills to provide commercial and accounting advice to a range of owner-managed businesses in the independent retail, education and professional services sectors. He also has extensive experience dealing with charities, Registered Social Landlords and not-for-profit organisations and co-operatives.   Outside of work, Paul likes to visit Eastern France and South-West German and read novels by David Morrell, Michael Blake and Harper Lee. He also likes watching films, his favourite is The Shawshank Redemption.

To get in touch please e-mail paul.newbold@torgersens.com.

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