Valuation of business

Valuation of business

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I have a client who is a building consultant/surveyor running a limited company with various members of staff. There are two directors with £1 ordinary share each. One director is going to buy the other out and needs the business valued. There is no goodwill in the accounts at present. The resigning directpr is a 'sleeping partner' and the remaining director works full-time in the business and receives a salary.

I am going to get a specialist in to prepare a report in this respect as it is not my area but I want to give my client a basic guide valuation in the meantime. The net balance sheet assets are approximately £60k, last year's turnover approx £330k and net profit circa £92k.

Any assistance will be gratefully received.
Denise

Replies (9)

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By martinfoley07
19th Feb 2009 16:00

i'd stick with the suggestions of all ........
....the previous respondents, Denise.

That would NOT mean
"looking at purely the more objective balance sheet valuation before the goodwill adjustment".
Please do not do this!
The very words "more objective balance sheet valuation" are just not useful to you, your client, or the specialist.
You would more likely cause more seeds of confusion than assistance by going anywhere with that.

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By AnonymousUser
19th Feb 2009 15:31

Thanks All
I wasn't intending to actually give the definitive answer as I am going to get in specialists to do that but reading the comments made has made me realise that 'no comment' other than looking at purely the more objective balance sheet valuation before the goodwill adjustment is the best route by far!

Thanks very much - there are enough hassles in business without bringing them on yourself!

Thanks again!

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By martinfoley07
19th Feb 2009 17:07

hmm....
Small business neither needs nor wants Goldman Sachs (whoever they were!) to advise them, on valuation or anything else.
But advising a client on an area where you self-proclaim to have no experience or knowledge by spending a few hours and having a go is not in a client's best interests, nor in Denise's best interests.

You have done a great job Denise to avoid the dreaded accountant's disease of assuming they can do anything, whatever your experience or expertise, by just having a go on a wing and a prayer.
Why accountants suffer this disease more than any other professions or trades I just don't know.

Does that mean that performing valuations requires a double first from Oxford in rocket science and astro-physics, followed by 25 years hard graft doing nothing but valuations? No.
But if you get someone to do the job properly for your client as you propose, you will
(i) get great tutoring free of charge - and free of risk to your client as well as yourself - so that your capability to undertake the work in the future will be genuinely advanced, and could then be built on
(ii) impress your client with your knowledge and understanding that you will do the best for them.
A win-win.

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By AnonymousUser
20th Feb 2009 10:51

Thanks again!
Thanks again folks for all the input, especially Martin for making me feel that I am definitely doing the right thing!

Thanks also to David for the link - much appreciated.

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David Winch
By David Winch
19th Feb 2009 19:02

Finding an expert

Denise

I personally would not accept instructions to value this business because, although I often take the role of 'expert' in legal proceedings, valuing a business is not one of my strengths.

However I know a number of people who are strong in that area - but are not Goldman Sachs or KPMG.

Have a look on the NIFA website at www.nifa.co.uk. NIFA stands for Network of Independent Forensic Accountants - each firm represented there has forensic accountancy skills but is a firm of a modest size (and sensible charge-out rates!).

David

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By thomas34
19th Feb 2009 16:25

Share Valuation
Denise, you should keep all advice in writing addressed to the company as your client and ensure that the non-active director sees the correspondence. You may be acting for the directors also, so need to be seen to be impartial.

You'll probably find that the Articles stipulate that valuations should be carried out by the auditors or in their absence (likely in your case) a suitably qualified person. This can be overriden by agreement between the parties.

There's actually not a lot of mystique in these jobs, the value being the net tangible assets plus goodwill. You've not mentioned dividends so let's assume none are paid. Goodwill may be valued at a factor times annual after tax profits, profits being adjusted typically for director's fees not in accordance with the going rate. A weighted average can be used to give a base profit figure, with more recent years attracting a higher weighting.

The factor will vary between 1 for a sweet shop up to 7 for ICI. I would suggest a factor of around 2 to 2.5 for small companies. Your client does have some goodwill in the form of staff and a customer base, hence my suggestion.

It's not your area but never will be unless you spend a few hours (as I did) giving it a go (and demonstrating to your client your breadth of knowledge).

At the end of the day, you may find two reasonable people, both with an interest in a quick settlement.

Good luck.

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By AnonymousUser
19th Feb 2009 15:14

I agree, Don't
I will not give a client a guide value before I've done the numbers. You need to look at average earnings adjusted for exceptional items and possibly directors' remuneration to bring that up (down) to a market rate. Typical you would use a three year weighted average. You then find a suitable eps from a listed company sector and then provide a suitable discount for unlisted and less than 100%.

And that is only for a fiscal valuation.

There may be something in the mem and Arts that specifies how the valuation should be calculated.

And finally, they are only calculated valuations. The only real valuation is what is negotiated between the parties.

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By User deleted
19th Feb 2009 14:23

No need
Valuations are subjective.

You will be setting yourself up for a fall if you give a guide price!

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David Winch
By David Winch
19th Feb 2009 13:50

Valuation

Denise

My advice would be - don't!

Alternatively you could suggest a broad range - say £2 to £500,000 for both shares. The value of one share may (or may not) be half the value of both shares.

David

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