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Valuing a Business
2. What Kind of Business is It?
Three basic criteria affect valuation.
2.1 The circumstances of the valuation.
- An ongoing business can be valued in several different ways (see 3).
- A 'forced sale' will drive down the value. For example, an owner-manager who has to retire due to ill health may have to accept the first offer which comes along.
- If you are winding up the business, its value will be the sum of its realisable assets, less liabilities (see 4).
2.2 How tangible are the business assets?
- A business which owns property or machinery has tangible assets.
- Many businesses have almost no tangible assets beyond office equipment. The main thing you are valuing is future profitability.
2.3 How old the business is.
A young business may have a negative net asset value, yet may be highly valuable in terms of future profitability.
- Many businesses make a loss in their first few years.
Multiple Values
A small unquoted business is usually valued at between five and ten times its annual post-tax profit. Previously - most notably in the IT market - the ratio has exploded, with some valuations being drawn from multiples of 70 or more. However, the differential has closed significantly, with IT-based companies seeing the sharpest drops.
Following the so-called 'correction', commonly accepted earnings multiples to value quoted firms range from nine or ten to 25, although some exceptions remain.
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