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Business Valuation Techniques
Establishing the value of your business can be difficult. Ultimately your business is worth what someone is prepared to pay for it. Understanding what this figure is can be imperative to a business owner or prospective buyer - independent advice is crucial for all parties.

It is vitally important to realise that these valuations, and the amount a purchaser is in fact likely to be prepared to pay, may be substantially different from the value you place on your business.

Techniques that are typically applied include, but are not limited to, the following:

1. Multiple of profits
Profits are adjusted to eliminate one-off factors - such as exceptional costs. Any changes that might be expected after the business is sold are also factored in - for example, if the current owner has been working without salary and will need replacing with a paid manager. These adjustments provide an estimate of 'normalised' or sustainable pre-tax earnings.
The valuation of the business is calculated as a multiple of these earnings. The suitable multiple applied depends heavily on the industry sector, size of the business and its growth prospects. Smaller businesses tend to be valued using lower multiples.
This valuation method is commonly used for growing businesses with a track record of profitability.

2. Asset valuation
Accounts will show the net book value of the business - total assets less total liabilities. It should be noted that these figures may not include any value for goodwill, the going concern value of the business. Any book figures will also require updating to reflect current values. For example, property or other fixed assets may be worth more or less than the book value. If the purchaser is likely to sell off assets, assets such as stock may be worth significantly less than their book value; there may also be extra liabilities such as redundancy payments for employees.
This valuation method is commonly used for businesses with high levels of assets (such as many property and manufacturing businesses) and for businesses that have poor growth prospects or are going to be wound up.

3. Entry valuation
This valuation method attempts to assess how much it would cost to create a similar business organically (i.e. from scratch), rather than buying your business. The valuation includes the costs of purchasing assets, developing products or services, recruiting and training staff, and building up a customer base.
Entry valuation can help trade purchasers decide whether buying your business is the right option for them. For example, a pharmaceutical company might want to choose between buying a biotechnology business and investing more in its own research and development operations.

4. Discounted cash flow
Discounted cash flow valuation uses estimates of future cash flow to value your business. The further into the future the cash flow is, the more heavily it is discounted - as 1 today is worth more than 1 in five or ten years' time.
The value calculated is very sensitive to the discount rate used.
This valuation method can be used for businesses with stable, predictable cash flows going into the future, such as utilities.

5. Rule of thumb
Different industries also have their own valuation rules of thumb that can be used to calculate an appropriate value. For example, some professional services and retail businesses are valued as a multiple of turnover. Other common valuation methods are based on size of a client database or value of transferable contracts.
Industry rules of thumb like these are often used in sectors where buying and selling of businesses is common. A valuation like this may well be used by a buyer who expects to significantly change the way your business operates - and to be able to achieve industry-standard levels of profitability.

Other considerations and influences on the valuation technique, and factors thereof include:

Growth prospects - the better your growth prospects, the more the business is worth.
Risk - the smaller the business, the higher the risks tend to be and the less a purchaser will pay; small, owner-managed businesses can be particularly risky for a new owner to take over
Special features - skilled employees, intellectual property or other special strengths of your business will increase its value
Opportunities - your business will be worth more to a purchaser who can increase profits (for example by cutting costs, or selling your product to their existing customers)
Cost of financing - a purchaser is likely to pay less if their cost of financing the purchase is high
Supply and demand - your business may be worth more if it is unique, or if there are several buyers looking to purchase that kind of business

Do you want to know about business valuation techniques? R A Valuation Services Limited specialises in providing valuations for small businesses in the UK and Europe for the purpose of business sale and purchase, partnership or shareholder change, litigation, matrimonial and legal separation, incorporation, tax settlements, borrowings and business development.

An accurate and independent assessment of the value of a business is an essential tool in any form of business change or development. Our Valuation reports are an important, if not vital, aid to business owners, prospective purchasers and their financial and legal advisers.

Generic Business Valuations
Can R A Valuation Services value any type of Business?
The valuation process can be applied to all types of small business provided that the business has a suitable trading history .... more >>

How does R A Valuation Services value a Business?
The valuation process is concerned, primarily, with an assessment of a justifiable value for goodwill .... more >>

What is R A Valuation Services Ltd?
Established in 1991, the focus was originally on opticians and goldsmiths .... more >>

Reasons for a valuation
A Business Valuation supported by a professionally prepared valuation report from an independent and authoritative source is an essential aid to:
  • Management or internal buyout
  • Business sale / Business purchase
  • Partnership and shareholder change
  • Litigation e.g. legal separation
  • Incorporation
  • Tax agreement
  • Borrowing and funding
  • Business development
  • Benchmark / Performance indicators for business
  • Report is definitive & realistic in the market place
RA Valuation Services Ltd
Recognised Authority
Valuation reports produced by R A Valuation Services Limited are acknowledged to be the authoritative form of business valuation for many small and micro business sectors and are accepted by:
  • HMRC
  • Bank managers
  • Other lenders & providers of finance
  • Accountants
  • Tax specialists
And an RA Valuation Services' valuation report is tailor-made for their purposes. Indeed, such is their authority that an RA Valuation Services' valuation report is normally insisted upon in support of negotiations.

The report itself is detailed and informative, professionally presented and smartly bound.
Accredited by the AOP
Accredited by the AOP

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