How to Value a Business

How to Value a Business

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I wonder if anyone can advise on the best way forward to working out a valuation of a business?

My incorporated client has a current turnover is £194,000, GP is £122,000 NP before taxation £56,500.

In the previous year these figures where:  Turnover £182.775 GP £117,300 and NP before taxation £44,342.

They are a cash based business whose customers pay them straight away for their service.

Is there a set formula for working this out?  I haven’t had to look at this before.  It is not for anything legal, it is purely to investigate a rough valuation, before paying someone else to come in and value it officially.  As currently 3 family members own it, and one may wish to leave and the other 2 take on their share of the business.

Replies (9)

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By pawncob
26th Aug 2014 11:45

Books have been written

by the hundred, all dealing with business valuations.

There are many ways to value  a business. Asset based. Income based.Furture prospects.

Is income dependant on a personality or location that will change on sale? What other factors apply uniquley to this case?

In this case a value based on N.P. (AFTER allowance for a manager's salary) with a multiple of any Superprofits to determine Goodwill value (Which is really what we're talking about)

Add to this any assets and you have some idea of a starting point for a valuation.

 

 

 

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By johngroganjga
26th Aug 2014 11:44

You need to work out the maintainable earnings after notional arm's length remuneration for any shareholders who work in the business.

A rough valuation would be between 3 and 5 times that amount plus or minus an adjustment if there are surplus assets or the company is seriously under-capitalised.

Of course, if net assets are higher than that forget the above.

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By Carolynne
26th Aug 2014 12:49

Valuation

The third family member, no longer works within the business, and is retired. 

 

So does this mean that I add the turnover LESS the wages the 2 working directors/shareholders take, LESS the dividends they draw?  Then multiply this figure by between 3 and 5 times. 

 

(The assets are only very small £3,500 with reserves of just £400, as the business is on its way up from a few bad years earlier).

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By johngroganjga
26th Aug 2014 13:00

No I said "notional arm's

No I said "notional arm's length remuneration".

That's not the same as the sum of their actual salary and their actual dividends.

And I said capitalise profit not turnover.

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By Carolynne
26th Aug 2014 13:21

I read it too quickly

I have read it again with your last response, and have now understood.  Thanks for taking the time to contribute to this question.  Clients just expect you to know everything don't they.  Unless you have done one before it usually takes a bit of investigation.  

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Teignmouth
By Paul Scholes
26th Aug 2014 15:25

Have a look at...

The ACCA's factsheets 167 & 171 on:

http://www.accaglobal.com/uk/en/technical-activities/technical-resources...

They give some really good general advice, including possible profit multiples and discounts for part shareholdings.

 

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By Carolynne
27th Aug 2014 14:30

Software Package

I also looked at a software package recommended to me called 'Business Valuer', but as it costs £262.80 including VAT, for a one off, it just isn't worth it to me.  There was something online called Value my Business, where it does a ready reckoner, but again it would depend on what type of valuation you require.  So thank you Paul I will look up the link you have posted.

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Teignmouth
By Paul Scholes
27th Aug 2014 21:17

Software

I think I bought TBV a few years back and whilst it produced a nice looking report it is no replacement for knowledge, ie it was far too basic to cover anything other than the simplest of businesses and, even then, you could find reasons why you'd want to change the results.

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Glenn Martin
By Glenn Martin
27th Aug 2014 23:35

Multiples of EBItDa is the standard
These days for bank and other valuations.

This works fairly well for stand alone businesses ran under management
EG care homes value at between 7 and 9 x EBITDA for a freehold.

Smaller businesses are more difficult if owner has significant input into operation and true salary cost may not be represented in accounts as mentioned above.

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