Business valuation – the main area in which there is predictable disagreement between buyers and sellers.
You think your business is worth £1,000,000. Your buyer thinks it’s worth £500,000. Just remember that, during your time running your business, you’ve done deals with customers on a daily basis when you’ve wanted this amount for something and they’ve wanted to pay you that amount. You meet somewhere in the middle because that’s how, ultimately, deals are always done. It’s going to be exactly the same with the sale of your business but on a much grander scale.
In this article, TWP Accounting looks at how businesses are valued and how those valuations are used during negotiations and bidding competitions.
From turnovers of £50,000 running into the millions, accounting firms like TWP have provided indicative valuations for companies across the spectrum, including but certainly not limited to estate agency, restaurant, taxi, cleaning, lettings, HVAC, hairdressing, services, IFA, pizza delivery, internet services, recruitment, retail, and landscaping businesses. This valuation gives you a benchmark to work from and it often helps owners make up their mind about whether now is the right time to sell.
Search “value my business calculator” and you’ll find plenty of business valuation calculators to choose from. We think they’re clever and that they serve a purpose in giving a company owner a ballpark “value my business” figure but please do not believe that the answers reflect reality in any meaningful way.
Business valuations vary between different sectors and different countries. A “value my business calculator” version generally produces results based upon the multiples of profit.
This takes the average amount of profit after tax you’ve made over a period of three years and then applies a multiple to it. For example, if your company made £200,000 average annual profit after paying corporation tax over the last three years and your sector had a multiple of 3, your business would be worth £600,000.
Multiples are different by sector. For example, accountancy practices have a very low multiple (1 to 1.5) whereas IT or technology companies can have a multiple of 4-5.
This is an unreliable way of coming to a business valuation though because, if your profits have been going down year on year over the three years but they still average £200,000, your company will be worth less than a company whose earnings has been going up over the same time period and averaging the same amount of profit.
Your profits may be temporarily low against your level of turnover but your business might be worth a fortune because it would be very difficult and expensive to build a business to compete against it.
Maybe you have patents and will save big sums in corporation tax every year with a patent box. Maybe you have exclusive supply agreements. Maybe you’ve gone through 100 sales reps to find the 15 who can actually sell.
Your investment of time, money, and resources has been intensive but you’ve come through to the other side and are a year or two away from making serious profit.
It might take someone else three years to get to where you’ve got now but by the time they have, you’re still three years ahead of them.
Barriers to entry significantly inflate a business valuation and, when providing our ballpark valuation, we will identify with you the barriers to entry any other company would face when putting together your sales adverts and presentations.
Does your company own a lot of assets which generate cash, even accruing in value as time goes by? You should think about placing the highest justifiable price on those assets and the business processes around them knowing that your buyer may try to negotiate you down from that point.
Have your business and its assets grown at a steady rate over previous years through planned and careful expansion? Is it reasonable and justifiable to expect that rate of increase to continue if the modus operandi used to achieve that growth is continued over the next three to five years?
If so, you can use a discounted cashflow model to base your business valuation on – essentially, sell your company for more than it’s worth now but for less than it might be worth in 5 years’ time to give your buyer comfort by reflecting risks in that future expansion may not be as smooth as past expansion.
Don’t rely on a calculator on the internet to value your business. We’ve outlined four different business valuation methods – there are many more which may suit your company better.
If you want help to prepare your business for sale, get in touch with us. Contact TWP Accounting on 01932 704 700 or email your accounting partner at email@example.com.