When you are considering how to value a small business for sale, it should be remembered that there are a number of ways to achieve this outcome. Additionally, the business owner will be looking to maximise the price he or she can possibly achieve and the buyer will be looking to drive this price down.
Certain components of the business can be valued relatively easily. These include items such as stock, machinery, equipment, land and property. However, other components of the business such as goodwill, intellectual property, reputation and trademarks are far from straightforward to put a value on.
An owner will often find the value of his business is related to what someone is prepared to offer him/her and their own personal circumstances.
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For a free initial discussion on how we can help you with the legal aspects of valuing and selling your business, get in touch with us today. We will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help maximise your sales price and also avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or complete our online enquiry form and a member of the team will get back to you.
What Are The Various Valuation Methods That Can Be Used?
Multiple of Earnings: In this instance, a variable figure known as a price to earnings (PE) ratio is used. This PE ratio often varies from industry to industry. Using this technique, a valuation is derived by establishing what the income of the business is and then multiplying it by the PE figure. For example, if your business generates £100,000 post-tax profit and is in an industry where a PE ratio of 5 is considered reasonable, the business would be valued at 5 x £100,000 = £500,000.
The key to this technique is how to find the PE figure. Business consultants often use figures between 4 and 10 dependent upon the industry and the specific circumstances of the particular business. In a small business, for example, the generating of profit can be quite precarious. Key staff could leave the business or a major customer may cancel a contract often leaving the business in a dire situation. As such, PE ratios are normally smaller for small businesses compared to larger concerns where they are often better placed to survive the often tumultuous nature of commerce.
It should also be remembered that businesses, where profits are growing rapidly, will also command a higher earnings multiple than firms where profit growth is low or there is no growth at all. Most incoming purchasers will want to see that there is potential for growth, not stagnation.
Valuing Assets: This technique involves valuing all the tangible assets of the company (stock, machinery, property etc). This method is often employed when valuing a company whose business model is based around holding these kinds of assets such as property companies.
Cost To Duplicate: Often heard in the BBC TV program “Dragon’s Den”, the judges analyse a business looking for investment and dismiss the valuation based upon the cost to actually replicate a similar business from scratch. This would often include the cost of developing a customer base and reputation, recruiting and training staff, purchasing assets and developing products and services.
Discounted Cashflow: This technique involves forecasting how much cash flow the business will produce in the future and then, using an expected rate of investment return, calculating how much that cash flow is worth. A higher discount rate is typically applied to new business ventures, as there is a high risk that the company will inevitably fail to generate sustainable cash flows. The trouble with this method is that the quality of the DCF depends on the valuer’s ability to forecast future market conditions and make good assumptions about long-term growth rates. In many cases, projecting sales and earnings beyond a few years becomes something of a guessing game.
Industry Valuations: In certain industries, when businesses are bought and sold on a regular basis, industry-accepted standards are sometimes used to value a company. Examples of such industries include recruitment agencies and accountancy practices.
Is There Anything Else That Can Affect The Value?
- The prevailing economic climate.
- Putting a value on intangible assets such as trademarks and reputation.
- Putting a value on fixed assets where some will have depreciated whereas others will have gone up in value.
- Why are you selling? If you need a quick sale you will invariably get a lower price.
How we can help
We have a proven track record of helping clients sell their businesses no matter the size. We will guide you through all the necessary legal due diligence in a comprehensive and timely manner. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact our Corporate Solicitors
It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of saving you money and ensuring you achieve a positive outcome.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or allow a member of the team to get back to you by filling in our online enquiry form. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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