Expert guide: Valuing a company

By Adrian Ward, director, AMS Business Sales

The question of how to value a business is one which pops up frequently on Accountingweb. In truth, a business is only worth what someone will pay for it. The price paid on the day of sale is the only time that a company value is not a matter of opinion or conjecture.

It is useful to meet two or three experienced accountants, professional advisors and brokers to guide you on the value of the company. It is at this point a decision must be made on whether to use an intermediary to sell the company or to go it alone.

Continued...

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Comments

Angelas Specialist Recycling Start Up

lawrencematthewj | | Permalink

Angela,

I'd agree with lauventure that your team neees to be consulting specialist SME finance providers. For private equity the key is to get an adequate proposition in front of many. If they are interested in the sector/segment investors or their reps wil be prepared to dig deeper. An additional thought is have the team fully explored Govt funding given the term "specialist recycling" there must be strong possibilities of early stage support.

Please feel free to contact mjlawrence@ntlworld.com if you would like to discuss.

Valuing technology start-ups

AnonymousUser | | Permalink

Interesting point of view. Assume the article was written based on personal experience. It becomes even more challenging when valuing a technology start-up, at pre-revenue stage.

We are trying to raise funding, and our valuation is based on discounted future cashflows for the next three years with discounted horizon value, thereafter. We have chosen opportunity cost of 20% but this can easily be increased to 40%. This valuation is further reduced by a percentage to arrive at the offer price, which in opinion, is considered as market value. These figures gives a ROI over 1000%, and subjective.

We have not got to the next stage of negotiations, which no doubt will be painful.

Recent thoughts are to let small amounts of shares, say for minimum investment of £2.5k. Then we have a better chance of preserving our valuation, but it becomes harder to raise the original amount we want. In the meantime, our valuation increases, as we get closer to revenue generating stage.

So if you want a small portion of a high growth company, please do contact undersigned in the first instance

Best regards
Manoj Ranaweera
manoj.ranaweera@ebdex.co.uk

But isn't this only part of the story?

lynnecart | | Permalink

I was lucky enough to spend some time, some years ago, working within the Business Valuations department of a Big 5. The way I was taught to approach a "normal" business valuation (i.e. not involving intellectual property/options etc. etc.) included, but was certainly not limited to, the multiple methods described above.

I think an article pitched at this level should mention that it is wise to apply several different methodologies and compare the results - generally speaking, if said results are consistent, you might be more comfortable that your valuation stands up. If they are wildly disparate you need to look more closely.

For example, you might use the multiples approach above and come to a conclusion on a range of value... but what if this is not supported by the NPV of future cash flows? What if the book value of net assets exceeds the multiples conclusion?

NB. Multiples can also, with a great deal of care and experience, be applied to P&L results other than the bottom line.

Start-up problem not confined to tech companies

angehodgson | | Permalink

The valuation of a start-up is difficult for many start-ups, not just technology businesses. It is relatively easy to value businesses which are similar in scope and structure to those that already exist, but for very novel business ideas it is very difficult to either find a model to benchmark against or to confidently identify an appropriate multiplier: an especially difficult task when the first years of the business are spent building up your customer/client base and your operational capacity.

I'm currently working with a group attempting to set up a specialist recycling facility. The management team have the technical skills to pull it off, but like many start-ups, lack the funds needed to make the substantial capital investments they will need to operate not only within the regulatory regime but within their own business and ethical codes. Apart from trying to get them to focus more on what they conservatively expect to achieve after several years, in order to support their requests for initial funding, does anyone have any constructive suggestions to assist?

What about the value of accountancy practices?

roncoates | | Permalink

Does anyone have first hand experience of what accountacy pracises are selling for in pracitse and/or negotiating a value with the reveune when the "sale " is to a connected party.?
Does the range say .9 to 1.5 of gross reaccuring fees still stand up ?

Angela's start-up problem

gus.orchard | | Permalink

Angela, this is an area where you will need an expert fund-raiser with experience of the market and the characters in it. If you drop me an e-mail (gus@lauventures.com), I can put you in touch with someone who has successfully raised money for ventures such as the one you're describing.