- Fantastic Team
- 5min read
- Published: January 14, 2021
- Views: 84
How to Value a Business in the UK
There can be many reasons you need to work out how to calculate the value of a business.
You might want to sell. You might want to buy. You may want to know your growing company’s value so that you can secure outside investment.
Whether you are a small business or an established name though, there are several different accepted approaches for establishing the value of your business.
Calculating the value is not an exact science. You don’t want to end up massively inflating your business’s value. But neither you want to end up selling yourself short.
Here are the basics of what you need to know about how to value a business in the UK:
Why Would You Need to Value a Business?
Before we nail down the how, it’s important to consider the why. Understanding why you’re conducting a valuation can provide all the motivation you need to get it done. You might want to:
- Sell your business
- Buy another business
- Boost your business’s perceived value
- Establish a good share price for an internal market
- Measure management performance or provide incentives
- Measure growth or progress towards a goal
- Secure outside funding for expansion
How Do You Value a Business as a Whole?
Any business has numerous aspects that are comparatively simple to value. You might think of the stock on your shelves or your physical premises. But it’s important to remember that any business also has the so-called “intangible assets”. These might include:
- Your brand reputation
- Your clients and the value they offer
- Your team and the value they produce
- Your products and trademarks
- The circumstances of sale (a forced sale will reduce the value, while an ongoing business has more options available to it)
- Length of your business’s trading history (time in business)
How Do You Value a Small Business?
There are several ways to value a business. The one which is best for you will depend on:
- The size of your business
- Your type of business
- Your mix of tangible and intangible assets
- The reason for your valuation
It’s common to apply at least two of these business valuation methods to work out how much a given company might be worth:
1) Price-to-Earnings Ratio
If you make a steady profit, your P/E ratio might be your best solution for a business valuation.
Price-to-earnings ratios themselves can vary by quite a large degree. To establish your P/E ratio, you simply multiply your annual after-tax profits by your given ratio. A ratio is a number commonly between four and ten. Though for a quoted company, it might be as high as twenty-five.
You would expect a higher P/E ratio if:
- our business has high forecast growth
- ou are something like a tech start-up firm
- ou can demonstrate high repeat earnings
2) Cost of Entry
A cost of entry valuation simply takes into account all of the costs involved in setting up your business if you started from scratch right now. This will include everything involved in establishing your business:
- Start-up costs
- Staff hiring and training
- Product design and development
- Marketing and advertising
- Buying assets
You then need to subtract the ways in which you could save money if you were to do it all again. This might mean starting up in a less competitively-priced region of the country, for example. Or using more suitable tools or technology.
The final total of costs minus potential savings is your entry cost valuation.
3) Asset Valuation
If you have a large number of tangible assets, an asset valuation is probably a good way to value your business. Of course, if the big question on your mind is, “how do you value a business with no assets?”, this is not going to be the method for you.
However, for manufacturing companies, property businesses and the like – anything with a large list of stable assets – this is a good solution.
All you need to do is total up your assets (you can start with your NBV or Net Book Value – the assets you’ve listed in your accounts), subtract the liabilities and adjust the value of your assets to show where they’ve changed over time. Then you have an asset calculation.
4) Discounted Cash Flow
How do you value a business based on turnover? Discounted cash flow might be your solution. Based entirely on projected future cash flow, this calculation is most suitable for businesses which forecast a steady cash flow for years into the future.
The projected future cash flow is then discounted to take into account potential risks to the business as well as an important concept called the “time value” of money. This posits that money today is worth more than the same amount of money received later.
5) Industry Valuation Rule of Thumb
Many industries and sectors have rules of thumb for calculating the value of a business. If you are in an industry where buying/ selling companies is common and you need to know how to value a business for sale, you will almost certainly find that an accepted formula exists.
The basics of this formula will likely be based on the aspect of a company which has the most value to people who might wish to buy it, such as:
- Number of contracts or existing clients
- Number of real-world locations
- Annual turnover
How to Value a Business in the UK
Overall, it’s important to remember to choose business valuation methods which walk the line between not over-valuing and under-valuing yourself.
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Perhaps the most important part of working out how to value a business is deciding on the most suitable calculation methods for your business type.
Of course, there is an easier solution. If you’re thinking about buying a business and need a valuation, consider franchising. Buying a franchise means you’re the boss of your own business. But it also means you have all of the support of a major brand behind you.
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