Most people are interested to know what their business is worth, however business valuations can be complex computations. While well-known valuation methods can give you a rough idea, ultimately your business is only worth what someone is prepared to pay for it. The right approach to negotiating a sale can have a big effect.
There are several standard techniques that can be used to provide a benchmark valuation for your business. Using several different valuation methods can help you come up with a range of valuations for your business. It’s important to realise that these valuations, and the amount a purchaser is in fact likely to be prepared to pay, may be substantially lower than the value you place on your business.
Whole Company Valuation
We are often required to value business interests, typically limited companies, but also business interests constituted as partnerships, limited liability partnerships and sole traders.
Typically it is the valuation of a company as a whole. We have very significant experience in this area both from the preparation and review of many reports within legal proceedings, but also through our day to day corporate finance work involving the purchase and sale of limited companies and other business interests.
John Green and David Sharpe both hold the “CF” Corporate Finance qualification of The Institute of Chartered Accountants in England and Wales. John Green and Jeremy Rowe are both accredited forensic accountants, again of The Institute of Chartered Accountants in England and Wales.
Our approach is to value the company on both the earnings basis of valuation and net assets basis of valuation. We determine maintainable earnings having considered and adjusted as necessary historic statutory accounts, current year management accounts, budgets and financial projections. We determine net assets having restated the balance sheet to current market values and separately considered the value of any goodwill.
We use many reference points for the determination of an appropriate p/e ratio including the BDO Private Company Price Index, UK 200 Group Small and Medium Enterprises Valuation Index, The Financial Times Share Indices, the Zephyr corporate finance database together with our own experience of actual transactions from working in this area.
The valuation of an individual shareholding is not necessarily a straightforward pro rata percentage of the value of the company as a whole.
This is because of the rights and benefits attaching to different levels of shareholding as a result of the Companies Acts.
An individual must own greater than 50 per cent of the ordinary share capital in order to pass an ordinary resolution required to declare dividends or to remove or appoint directors.
An even higher shareholding of 75 per cent is required to pass a special resolution in order to bring about a sale of the company.
Hence a shareholding of below 50 per cent is often subject to a discount for minority interest.
The discount level varies depending on the level of shareholding being valued, its relationship to the other shareholdings and the overall number of shareholders involved.
Our starting point is the various published guidance in this area as a reference point adapted and tailored thereafter to the specific circumstances of the shareholding to be valued.
We will also consider any previous transactions in the company’s share capital.
This is a concept established by the courts which effectively categorises a limited company as a quasi partnership.
As partnership shares are not discounted as compared to their pro rata value of the partnership then no discount is attached to a minority shareholding in a company deemed to be a quasi partnership.
The concept was originally established through case law. The key characteristics are where a group of individuals have chosen to carry out their business together under the constitution of a limited company which they could just have easily have traded as a partnership.
The criteria involved to establish a quasi partnership are mutual trust and understanding, one of more of the parties working in the business, the provision of capital by some or all of them, together with protection in the company’s articles to preserve the private nature of the company.
Hence we are often instructed to consider in our valuation of minority shareholdings whether the company constitutes a quasi partnership in order to reach a conclusion as to the appropriate, if any, discount to be applied in the valuation of the shareholding.
Goodwill is an intangible asset which represents the difference between the value of the business as a whole and the value of the separate net assets and liabilities included in the balance sheet.
It includes the ability to generate profits from a collection of assets, an established workforce or a business idea, the business connections including regular customers, and the established name and reputation of the business.
Often we are instructed to comment specifically on whether a limited company has a goodwill value in addition to the value of its net assets.
Typically this situation involves an owner managed company where one particular individual is the driving force and energy within the company.
The point to be determined is whether his replacement would be able to generate the same level of profitability or otherwise.
If, in our opinion, there is a goodwill value we are then required to provide a calculation of this.
As stated above in larger companies this involves undertaking an earnings based valuation and the value of goodwill is then the difference between the value of the company as a whole and the value of its net assets.
However in smaller limited company or unincorporated entities who may provide little more than a living for the proprietor, a separate exercise is undertaken to provide an additional figure for the value of the goodwill over and above the net assets.
Typically this involves consideration of the maintainable earnings of the business, having adjusted for the remuneration of the proprietor himself, and application of a multiple thereto.