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.
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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.
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.
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.
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.
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.
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.