The valuation approach
The value of a business depends upon a great many factors, including the general economic climate, the prospects for the particular industry that the business is in and, of course, on the individual business itself. Whilst a competent valuer will take account of all relevant factors, there are a number of key, common elements to most valuations and these include the following:
- An earnings based valuation will have regard to past earnings of the business but, more importantly, will examine the ongoing and future earning potential of the business. This is the most common approach when valuing a business as a whole. A price earnings multiple, bearing in mind such factors as the economic climate, comparable companies, other deals, and so on, is then applied to arrive at the value of the business.
- An alternative approach is a dividend based valuation which takes account of the historic and anticipated future dividends of the business. This method is often appropriate to relatively small minority holdings in a business.
- For most trading companies, the earnings basis of valuation is more likely to apply than the actual assets employed in the business. However, where the value of a company or business is largely in its fixed assets, such as a farm or a property investment company, then the assets become a much more important factor in arriving at a value.
The above is only a very brief outline of some of the key factors which can be involved in the valuation process and when you consult a valuer, depending upon the nature of the business (ie. a sole trader, partnership, LLP or limited company) you are likely to be asked for a lot of information including:
- Accounts for the last three years
- Up to date management accounts
- Budgets, forecasts and, if they exist, Business Plans
- Articles of Association (for a company)
- Shareholder or Partnership Agreements
- Commercial information regarding the business
- Valuations of specialised assets such as property
- Any recent valuations of the business, transactions in shares or offers for the business.
Don’t forget that the process is not just about arriving at a value for the business, it will also involve an assessment of the liquidity. It is quite possible that a spouse may not be able to draw enough out of a business to make a full settlement and that payment will have to be made over a period of time. There may also be significant tax issues with regard to any funds withdrawn and it is critical that the right advice is sought in that area.
If you would like to discuss your particular circumstances with a view to receiving a business valuation, please call Malcolm Coomber on 020 8652 2450 or email mec@clarksonhyde.com
