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Business valuations

19 July 2018

 

We all want to know what our assets are worth.  This could be to aid a potential sale, for tax planning purposes, or even for the feelgood factor.

Valuing a house isn’t so difficult after a visit to the local estate agent to ascertain the prices of comparable properties.  But how are businesses valued?  And why?  And what different valuation methodologies are used?

Valuation techniques

The main techniques used to value owner-managed small and medium-sized enterprises (SMEs) include:

  • Discounted cashflow
  • Capitalisation of profits
  • Relative valuation
  • Asset based valuation
  • Capitalisation of dividends

There is no magic formula used to value a business: valuations rely upon the professional expertise and judgement of the valuer.  The choice of method and all associated inputs is down to the valuation expert.

This means that two experienced and professional advisers could (and would likely) deduce two different valuations for a business. Hopefully, though, these values would not differ drastically.

Reasons for a valuation

Valuations of businesses could be undertaken for commercial or fiscal reasons.  A fiscal valuation is a determination of the value of a business at a point of time so that any resultant taxation can be agreed with the tax authorities.

Reasons for undertaking commercial valuations could include:

  • Valuing the stake in a business for a shareholder joining or leaving the business
  • Aiding potential vendors of businesses to understand likely sales proceeds
  • Assisting acquirers of businesses in structuring an appropriate package with which to buy a business
  • Assisting Courts in appropriating assets in the event of divorce
  • Probate valuations
  • Expert witness valuations supporting litigation

It is crucial to remember that the price of any asset is determined by the marketplace.  Therefore any valuation placed upon a business may not necessarily correspond to the actual price for which that business would change hands on a sale.  This could be because the buying party is willing to pay a premium perhaps to secure a particular customer. Alternatively, the seller may be willing to sell at a discount to facilitate a quicker transaction.

Types of valuation

Even when a valuation is contemplated, the parties must first agree to the type of valuation required.  Commercial valuations are normally classified as being owner values, market values or equitable values.

The difference between the various types could fill an entire book but put simply:

  • Owner value corresponds to deprival value (what the owner would require to be deprived of the asset)
  • Market value corresponds to what the asset might fetch in an open market between a willing buyer and seller transacting at arm’s length
  • Equitable value corresponds to what is fair between the two known parties transacting

To illustrate the difference: the market value of a 15% shareholding in a company may not correspond to 15% of the total value of the company, but the difference would depend on the composition of the remaining shareholders and the identity of any buying party.

This all means that for a valuation to make sense, the valuer must be provided with all relevant information on the business together with the precise reason that a valuation is required. This will enable the parties to agree on the most appropriate valuation type for their purpose.

This may sound daunting but we’re here to help.  BKL’s corporate finance team has plenty of experience in valuing businesses for a variety of reasons.  We’ll advise you on the most appropriate valuation for your needs and undertake it efficiently.

To find out more, please contact us using our enquiry form.