How do you work out what the family business is worth?

Published 26th July 2021

How do you work out what the family business is worth?

What is a business valuation?

Business valuation is a process that determines the economic value of a whole business or company. It can be used to determine the value of a business for a variety of reasons such as; sale value, establishing share value or partnership shares , taxation, shareholder disputes and divorce cases. Anybody looking to value their business must seek professional advice and expertise.

Public quoted companies are required to report their finances on a quarterly and annual basis and are valued by the market through their share price. However when it comes to a family business there is no market in the shares and they may go years without knowing how much their business is worth.

Why is a family business valuation important?

A business valuation can provide a clear picture of your business’s financial health. It can also give you an indication of whether you should take action to make the most of your potential.

Getting a family business valued isn't just about the numbers, it can also provide a detailed overview of your company's present position and help you develop a strategy for the future.

Determining the health of your business, your future direction and its value can help you communicate that value to third parties with ease.

For family businesses, which have been passed down through generations, having the business valued is a crucial component of any business strategy and succession planning.

Reasons for getting a family business valued.

Is estimating the value of a family business different from valuing a private company?

The overheads of family businesses are often more likely to include elements of non-commercial expenditure such as local sponsorship, entertaining expenditure, or family members being employed within the business on exaggerated salaries for the work undertaken by them

It is therefore important to seek professional advice from a valuation expert, who can consider any such expenditure in assessing the true maintainable earnings of the business.

Matters to consider which can impact the value of a family business.

Many different factors can impact the value of your business. An awareness of these can help to understand how the business is performing and assessing the underlying value.

Family-owned businesses aren’t typically managed in the same way as larger companies. Although there are many very successful family businesses in the UK, working together can bring out the best, and sometimes the worst in families.

Business owners may employ family members as they feel like they can trust them more, or employing them makes it easier to pass the business down.

When it comes to valuing your family business, an account needs to be taken of whether all family members are qualified for the role they have been given and whether they are being paid a commercial salary for that role.

In addition family members, who are also shareholders, may take income from a company in the form of dividends rather than salary which further complicates matters.

As a result of this, in assessing the underlying profits, adjustments are normally required to take account of the commercial worth of the work undertaken by the directors and family members employed in the business.

We all like to treat the ones we love from time to time. Valuation experts will look beyond the relative's base pay to consider whether the perks they receive are justified commercially for the business.

Some of these perks may include an allowance for company vehicles, entertaining, country club memberships, golf trips, and even sometimes interest-free loans.

Family businesses often have one key person behind them. This person may have the experience and customer contacts which drive the business forward.

From a valuation perspective, the impact of this key individual can reflect on the value of the business, particularly if they are close to retirement. For example, the ability, time and cost required to find a replacement who can take over the responsibilities of the key person will need to be considered.

As family businesses grow, it is important to consider delegating responsibilities and adopting a more flexible approach to management duties when possible.

Families working together can sometimes prove difficult particularly in the second and third generations where the founder has retired and siblings work alongside each other.

It is natural for there to be disagreements from time to time, but when these disputes involve the future of the business and strategy, it can become an issue undermining its value.

It is crucial to be able to address and overcome family disputes especially in the run up to a sale of the business. It is important to have a common strategy and outlook when dealing with third parties.

Our highly qualified and experienced Corporate Finance and Forensic teams have the knowledge and expertise required to value your business.

1. We understand the purpose of valuation.

The first thing we do at Pierce is to understand the purpose of the valuation. This can dictate the approach applied and have an impact on assessing the value.

2. We get to know you and your business.

We then get to know about you and your business, from the company background, strengths, weaknesses, and future potential. We can then ask questions about your plans for the future. Do you plan to grow and develop the business or is it a case of maintaining what you have built up?

3. We gather relevant data

We analyse the financial accounts and other information such as budgets, financial projections, customer base etc in order to assess the maintainable earnings of the business, We can then offer an accurate assessment of maintainable earnings.

4. We combine experience and corporate databases.

We then combine our experience of preparing valuation reports and buying and selling companies together with our access to corporate databases and indices of actual transactions to provide an assessment of the value of your business.

5. We help you look towards the future.

We work together as a team and tailor each valuation report to meet the individual needs of our clients. The value of the business will be assessed by taking into account the current performance, financial data and plans for the future.

The valuation of a family business and indeed any private business is largely a matter of judgment and the experience of a valuation professional is invaluable.

The Corporate Finance and Forensic teams at Pierce have been working together for over 25 years providing a wealth of experience in valuing family businesses. Therefore this is not something we do occasionally, it is something we are experts in.

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