Business Valuation: Why Knowing Your Worth Matters

By delving deep into various aspects of your business, a comprehensive valuation goes beyond mere financial figures to provide a holistic evaluation of your company's market value, growth prospects, and overall well-being.

Whether you are on the lookout for investment opportunities, contemplating a sale, or simply aiming to optimise your business operations, a thorough business valuation can offer invaluable insights to steer you in the right direction.

Ultimately, it provides you with the information you need to make decisions and serves as a solid foundation to shape your business strategies. This ensures that you are fully prepared to capitalise on opportunities and tackle obstacles with confidence and foresight.

What is a Business Valuation?

Business Valuation Methods: How to Calculate the Value of a Business

Accurately calculating the value of your business can be a complex task. As a first step, compare your business to similar companies within the industry, considering factors like size and revenue.

While this comparison can provide a basic understanding of your business's potential value, it is essential to take the next step with a professional business valuation. An experienced advisor will utilise specialised methods to calculate your business's value, drawing on expert knowledge and industry insights to deliver a comprehensive and objective assessment. These valuation methods may include:

• Capitalised Earnings
• Discounted Cash Flow
• Dividend Yield
• Net Asset

Capitalised Earnings Explained

Capitalised earnings is a method to estimate the value of a stable, established business. It involves turning the company's expected future profits into a single, current value.

How does it work?

1. Determine the company's "normal" earnings: Figure out how much the company is likely to earn consistently, year after year, without exceptional circumstances.
2. Choose a multiplier: This number is multiplied by the normal earnings to get the business's value. There are different ways to calculate this multiplier depending on the measure of earnings:
   • Earnings Before Interest and Tax (EBIT)
   • Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA)
   • The Price/Earning Ratio (P/E)
3. Calculate the value: Multiply the normal earnings by the multiplier to get the initial value.
4. Adjust for debt and cash: Subtract the company's debt and add any extra cash or valuable investments to get the final value.

In essence, capitalised earnings tries to figure out how much a business is worth based on its ability to generate steady profits.

Discounted Cash Flow Explained

Discounted cash flow is a method used to figure out how much a business or investment is worth. It does this by looking at how much money it's expected to make in the future and adjusting those future earnings to account for the fact that money is worth more now than it will be in the future.

How does it work?

• Estimate future cash flows: Figure out how much money the business will make in the future.
• Determine a discount rate: Decide on a rate to reduce the value of future money to its present value.
• Calculate Net Present Value (NPV): Add up the present values of all future cash flows.
• Estimate terminal value: Figure out the value of the business after the forecast period.

The discounted cash flow method does have limitations which include uncertainty in predicting future cash flows and choosing the right discount rate. Additionally, the terminal value heavily influences the final result.

Dividend Yield Explained

Dividend yield is a way to measure how much money you'll get back from a company as a shareholder, based on the share price. Basically, it helps you understand the potential return on your investment when you own a part of a company that regularly shares its profits.

To figure out the dividend yield, an accountant will consider:

• How much the company is likely to share its profits
• How much profit the company makes compared to the dividends it pays out
• How much return you expect to make on your investment

By looking at these things, an accountant or advisor can estimate how much money you might get back from your investment.

Net Asset Explained

Net asset basis of valuation is a way to figure out how much a company is worth by looking at what it owns and what it owes. It's often used for businesses that own a lot of physical things (like property, investments, or farms), or those that aren't making much money (or losing money).

Here's how it works:

1. Add up everything the company owns including things like buildings, land, and equipment
2. Consider hidden assets that aren't listed on its financial statements
3. Subtract what the company owes including loans and other debts
4. Adjust for taxes and subtract this amount from the value
5. Consider other factors like company size, risk and other important details to adjust value

The final number is the net asset value, which is often the lowest possible value for a company and this represents how much money you'd get if you sold everything the company owns and paid off all its debts.

A popular, simplified version of the net asset basis method is known as The Company Valuation formula. By subtracting a company's total liabilities (which encompass all debts and credits) from its total assets, business owners can get a sense of their company's net worth. However, this calculation only scratches the surface of the valuation process.

Choosing the right valuation method for your business is complex and requires expertise. Factors like industry, company size, and purpose of the valuation play a significant role. An accountant or business advisor can analyse your circumstances to determine the best approach and assess your business's value.

Why is Business Valuation Important?

Knowing the value of your business is important for a variety of reasons. This knowledge is the key to opening doors to new investors, strategic partnerships, and acquisition offers. Whether you're in the early stages of building your enterprise or considering an exit strategy, understanding your worth is crucial at every stage of the business lifecycle.

6 Reasons for a Business Valuation

• Mergers & Acquisitions:  Whether you're considering acquiring a competitor, merging with a complementary business, or preparing for a potential sale, a valuation ensures you enter negotiations with a clear understanding of your company's worth. This empowers you to secure the most favourable terms and maximize shareholder value.
• Securing Funding:  When seeking investment capital, a valuation serves as a credible benchmark for potential investors. It demonstrates the financial health and growth potential of your company, bolstering your ability to attract favourable investment terms.
• Strategic Growth Planning:  Business valuation isn't just about exits or external transactions. By identifying key drivers of your company's value, a valuation can inform strategic growth initiatives. It helps you pinpoint areas to optimize, such as brand development, operational efficiency, or market expansion, ultimately enhancing your company's overall value proposition.
• Estate & Succession Planning:  For business owners with a long-term vision, a valuation is a crucial component of estate planning. It establishes a fair and objective basis for ownership transfers, minimizing potential disputes among heirs and ensuring a smooth generational transition.
• Dispute Resolution:  In the unfortunate event of partnership disagreements or divorce settlements involving business ownership, a valuation provides a neutral and defensible assessment of your company's worth. This facilitates fair and amicable resolutions that protect the interests of all parties involved.
• Company Shares: Ensuring fairness is paramount when shareholders leave or join a company. Accurate valuation of the company and shares is crucial for both selling and buying parties.

A business valuation is a dynamic snapshot, capturing the value of your company at a specific point in time. This valuation is influenced by a multitude of factors, including prevailing market conditions, the company's financial performance, and assets.

These elements can fluctuate over time, making regular valuations crucial for maintaining an accurate understanding of your business's worth. By consistently assessing your company's value, you equip yourself with essential insights to make informed strategic decisions.