How to Value a Business: UK Owner’s Guide

If you’ve been wondering how to value a business, UK guidelines may differ from some of the other methods you may have seen online. There are multiple factors that British business owners will need to consider before arriving at an accurate figure.

Knowing the actual worth of your business can be useful even if you decide not to sell your business. It can help to inform potential exit strategies, secure additional funding, and provide an extra gauge of how successful your company is.

If you are looking to sell your business, however, it’s important to have as accurate a valuation as possible. Too high, and you’re unlikely to find a buyer. Too low, and you risk undercutting yourself. For this reason, it’s always recommended to enlist the help of a specialist business sales team to ensure any valuation is carefully arrived at.

 

Benefits to valuing a business

There are several different benefits to obtaining a valuation of your business.

• If you ever allow staff members to buy a stake in the business, a valuation will provide you with the information needed to set a fair price for the percentage share they’re looking to purchase.
• A valuation offers a unique insight into the health of your business. If you’ve had your company valued by a professional third party, be sure to ask them how they arrived at the figure they have. A fresh pair of eyes from an outsider is an invaluable tool for realising just where the value in your business lies. Conversely, it may also highlight areas that may not be performing as well as you think.
• Any owners hoping for outside investment will stand a much better chance of securing funds by providing potential investors with a current valuation. This gives them an opportunity to determine if they’re likely to see much of their investment back.
• Of course, a valuation is also needed if you plan to sell your business. Don’t wait until somebody shows interest in your company though. Sometimes the price is the main driver that piques a buyer’s interest, with some searching for an opportunity within a certain price range.

 

 

 

Which elements of your business can affect a valuation?

Financial records

Your business can be the most profitable company around, but if its financial records aren’t precise and well kept, it can be difficult to get a grasp of just how well it’s doing.

Messy records can also provide a negative impression toward your ability to run a business. If you’ve allowed something as crucial as your financial records to get out of hand, potential buyers are likely to wonder what other elements of the business have been neglected.

For the purposes of a valuation, however, missing invoices, or even payments can skew your valuation in such a way that it doesn’t represent your company’s true worth.

 

Your sector as a whole

Pay close attention to other sales happening within your industry. These can have an impact on any valuation you receive, as valuers may look to see how attractive your sector is as a whole.

New businesses opening nearby can have an effect too. If your company finds that it has several competitors all vying for custom in the same market, the value of your business could suffer as a consequence. Similarly, those that have cornered a particular market in a certain area, can expect that to reflect favourably on any valuation.

 

Staff

Most business sales involve the buyer taking on every aspect of the business they purchase. This includes all staff members currently employed by the company. While bad staff are unlikely to lower your valuation though, skilled and experienced workers can actually add value.

Certain sectors can find it difficult to recruit skilled workers due to a limited pool of talent. If your company already employs skilled workers that are happy and settled, then this can be a real selling point for potential buyers. The recruitment process can cost a lot of time and money, and there’s rarely anybody better qualified for a particular role, than the person already doing it.

 

Tangible assets

If everything went wrong with your business, and you were forced to close, you could still rely on money raised by your assets to provide value to your company. Tangible assets can take the form of things like equipment, current stock, and even an active client list.

Some assets will be easier to resell than others, however. Even if the shiny new machinery you purchased cost you a small fortune, if its usage is too niche for anybody else to get use out of it, you’re unlikely to sell it on for a lot.

Even items you may take for granted such as chairs and desks can be sold on, and due to the ubiquity of office-based businesses, they’re likely to be snapped up by somebody.

Any valuation you receive will take into account the likely resale value of all of your assets rather than what you paid for them.

 

Intangible assets

These are the non-physical assets that are difficult to ascribe a value to. Examples of intangible assets include trademarks, intellectual property, and strong relationships with lucrative clients. Any of these factors can affect your company’s valuation, so it’s important to gauge exactly what it is you own.

In the case of trademarks, for example, do you own the trademark worldwide, or just in one country? For a buyer hoping to grow internationally, this could make a substantial difference to the price they’d be willing to pay.

 

 

How to value a business: UK options

When it comes to how to value a business, UK directors have several different options they can use. Each method will suit different businesses and industries, so it can be difficult to determine which is best for your company. Because of this, it’s recommended to enlist the services of a specialist business sales team to value it for you.

Some even offer a free, no-obligation valuation which can take all of the hard work out of valuing a business for you. Our own online business valuation tool makes things easier still, with just a few simple questions to answer before you’re given your valuation. If you’re still determined to work out the price yourself, however, here are the most commonly used methods for valuing a business.

 

Discounted cash flow

This valuing tool is often used by well-established businesses that can have strong and predictable projections for the next few years.

Discounted cash flow could probably command a whole post devoted solely to it, but in a nutshell, it’s a case of determining how much future cash flows are worth today. This is achieved by applying a discounted rate that covers the cost of any risk (such as repairs or unexpected bills), as well as adjustments that value present money higher than future money. This is because £1 in your hand today has more earning potential than the same amount in three years’ time. By looking at the time range of the repayments, and the forecast that’s been projected, you can then remove the discount rate to provide a figure.

If the figure you’re left with is higher than the money a buyer is looking to put in, then that serves as a potentially great deal for them, and vice versa.

 

Cost of entry

This method is one of the most straightforward you can find for valuing a business. With cost for entry valuations, you’re basically just pricing up how much it would take to build a similar business up from scratch.

Don’t assume that you can just pull out your old receipts to see how much building your business had cost you, though. Unless your business is less than a year old, any fees you had to pay back then are likely to have increased by a significant amount.

That being said, you should base your prices on how much a thrifty entrepreneur might be able to spend to create something similar. If you pay more in rent because of your location, try to find a figure for a cheaper location, or price up budget options instead of your premium equipment. Try to incorporate costs for employing and training staff, marketing, and fitting out your premises when coming to your final figure. Everything that would be needed to replicate what your business is like as of today should be included.

 

Asset valuation

This method often yields the lowest valuation of businesses, mainly because it doesn’t factor in the market value (what a buyer may be prepared to pay). This valuation method only leaves us with a net book value (NBV). This might be more suitable for insolvent companies whose only real worth is in the assets it contains.

This valuation should include the value of both tangible and intangible assets. Stock, equipment, patents, trademarks, and everything else in between should be tallied up with up-to-date prices. Once you have the value of all of your assets, you’ll need to subtract the cost of all of your company’s liabilities to leave you with the net book value. Any debts will need to be deducted from the asset value to provide a price that shows the worth of the actual nuts and bolts of the business as it stands.

 

Multiplied revenue

Fledgling businesses that lack the financial history of more-established counterparts may opt for this method. Here, the company’s annual revenue is multiplied by a specific number.

What that number is depends on what a financial advisor suggests, but is usually determined by the sector the business belongs to. This is generally between 0.5 or 2, with typically slow-growing industries being allotted a lower figure, and high-growth sectors being closer to 2.

As you might expect, this tends to be the least accurate valuation method among those listed. Revenue alone gives no idea of profitability, and basing a valuation on this metric alone can produce results that may be way off.

 

Thinking of selling a business? We can help

With so many legal and tax obligations to navigate, selling a business can seem like a potential minefield. Even by just looking at how to value a business, UK company owners can find themselves dizzied by the sheer amount of options.

We’ve helped countless owners to sell their businesses for the best possible price to carefully vetted buyers. Call us on 0800 975 0380, or email [email protected] for a free consultation to find out how we can help.

Alternatively, try our free business valuation tool to see how much your company is worth.