The value of a business usually hinges on how much ongoing profit it is likely to make, balanced by the risks involved. Cash flow, profitability, and asset values may just be the starting points; it is often the hard-to-measure factors - such as key business relationships and goodwill - that provide the most value.
Factors influencing value
Intangible assets: intangible value – which, for many trading businesses, comprises the significant bulk of total value - can be derived from a number of factors including a dependable trading pattern, desirable and transferable contracts, well-respected brand, client loyalty and so on. These intangibles can be extremely hard to value without expert assistance.
Tangible assets: a company that owns property, machinery or notable levels of valuable stock usually has tangible assets that will have a quantifiable resale value.
Other factors that may influence the value of a business include longevity (including a proven track record), relationships with key customers and suppliers, key person dependence, management stability, intellectual property (IP) and individual circumstances.
Maintainable Earnings Valuation
The historical – and expected future - profitability of a business is used to determine its current value. A maintainable earnings valuation is especially useful for business valuation when profits may be expected to remain stable or predictable. Maintainable earnings are typically calculated from the financial performance from the past three or four years.
The most common methods are as follows:
The relative valuation method quantifies a value based on arm’s length open market transactions of a number of closely comparable businesses.
A company’s assets include tangible and intangible items. For certain industries and types of business, the book or market value of those assets can be used to determine the company’s worth. With trading ventures, the Net Asset Value may reflect the lowest value a company is likely to achieve.
Discount Cash Flow Valuation
The Discount Cash Flow (DCF) method can be appropriate if profits are not expected to remain stable in the future. The DCF method takes a business’ future net cash flows and discounts them to a present day value.
Industry rules of thumb
In some industry sectors, buying and selling businesses is common, which can lead to industry-wide rules of thumb that may be dependent on factors other than profit.
The key source of value in a business may be something that cannot easily be measured. Putting a value on intangible assets is not easy because that value can vary depending on the nature of the assets and the industry in which the business operates.
R A Valuation Services specialises in providing sensibly and competitively priced formal company valuation and business valuation reports for all types and sizes of sole traders, partnerships, LLPs, private limited companies businesses and other organisations in the UK and Europe.
We are happy to explain the process and what you would need to provide, so why not phone the office on 01425 402 402.
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