Gearing up to sell your business or bring in new investors?
A business valuation is a non-negotiable aspect for these moments, as it helps you understand and communicate your company’s worth.
Skipping a valuation or going with an outdated estimate leads to undervalued offers, costly negotiations, and even missed opportunities.
The valuation process, however, isn’t without its challenges. From collecting accurate data to choosing the right valuation method, there are several steps where missteps lead to errors.
This is where we’ve got you covered! We’ll discuss how you can value your business in detail along with different methods.
What is business valuation?
Business valuation is a process that determines the economic worth of a business. It takes into account various factors, such as assets, earnings, and market position.
Business valuation process involves analysing the business’s financial health, assets, liabilities, future earning potential, and market conditions. All these factors help arrive at an accurate estimation.
Overall, it covers:
- Tangible assets (think of physical assets)
- Intangible assets (non-physical assets)
- Financial performance
- Market factors
It’s important to note that it doesn’t cover the sentimental value an owner may place on the business or internal dynamics like team morale or future business ideas. Everything must be measurable.
This accurate number helps at the time of selling, merging, securing funding, or planning an exit strategy. It gives you a realistic worth of the company, avoiding undervaluation or overvaluation.
How to do business valuation in the UK
While a business valuation isn’t a legal mandate in the UK, certain situations call for a formal valuation due to legal, financial, or regulatory needs. It is still required for compliance, fairness, and decision-making.
As such, these are the different factors or ways that help you conduct an accurate business valuation in the UK:
| Approach | Description | Suggested benchmark |
| Market comparison | Recent sales of similar businesses within the same industry to measure value. | Similar businesses sold within the last 6-12 months, ideally in the same location. Market share above 20% in a niche market, or at least one unique patent/exclusive contract. |
| Owner’s earnings | Salary, benefits, and profits to understand profitability. | Positive and consistent earnings over 3-5 years; higher than industry average. |
| Brand and customer loyalty | Brand reputation, customer loyalty, and repeat business are indicators of future revenue potential. | Retention rate above 80% and NPS of 60 or above. |
| Industry trends and economic factors | Industry growth, stability, and market conditions to determine growth. | Industry growth rate of 5% or higher. Economic stability must be positive in the target market region. |
| Asset valuation | Stock of tangible and intangible assets to reflect resale potential and operational value | At least 30% of the overall. valuation. Intangible assets must be valued using industry standards. |
| Future earnings | Based on historical performance and industry trends. | Growth of 10% or more annually over the next 3-5 years. |
| Cash flow stability | Reliability of cash flow to understand financial health. | Good cash flow of over 5+ years with less than 10% fluctuation annually. |
| Market position and share | Relative to the competitors. | Top 3 position in the local market or share above 25%. |
| Location and facilities | Geographic advantages such as facility quality and infrastructure. | Location within a high-demand area or operational facilities with a capacity utilisation rate of 80% or higher. |
| Legal standing | Compliance with industry regulations and outstanding legal issues to avoid incredibility. | Fully compliant; zero outstanding legal disputes. |
Calculating how much is my business worth in the UK
- Gather Required Information:
- Latest year net profit
- Previous year net profit
- Total business assets
- Total business liabilities
- Years of trading
- Current business performance trend
- Calculate Average Annual Profit: (Latest year net profit + Previous year net profit) ÷ 2
- Determine Profit Multiple:
- Base multiple: 2 (for businesses trading 2 years)
- Add 0.5 if profits are steadily increasing
- Adjust as needed based on industry standards
- Calculate Net Asset Value: Total business assets – Total business liabilities
- Compute Business Value = (Average Annual Profit × Profit Multiple) + Net Asset Value
Review and Adjust: Consider any additional factors that might impact valuation.
What are the best business valuation methods?
It’s important that your business worth is accurate and that the value of a business is not over or under sold as critical decisions may be made based on this valuation.
Here are the best business valuation methods used to determine a business worth:
Discounted cash flow
DCF (Discounted Cash Flow) measures the present value of a business’s expected future cash flows. It accounts for the time value of money. This method is particularly useful in investment valuation, as it provides a clear valuation that reflects the future earning potential of the business.
It includes projected cash flows over a period along with terminal value, often based on revenue projections. This, in turn, helps investors make decisions based on financial expectations.
| DCF = ∑ CFt/(1+r)t |
Price-to-earnings ratio
The P/E ratio compares a company’s current share price to its earnings per share. It gives you insight into how much investors are willing to pay for each pound earned.
Think of it as a quick snapshot of market perception, which is aimed to attract investors. Also, this ratio identifies overvaluations or undervaluations within the market.
This method does not include company debt, cash flow variations, or differences in growth rates between firms, as these can misrepresent true business worth.
| P/E Ratio = Market Value per Share/Earnings per Share (EPS) |
Asset valuation
This business valuation method includes physical properties such as equipment, inventory, and property. It also includes intangible assets like patents and trademarks, which contribute to overall enterprise value.
For asset-heavy companies, this method helps understand the intrinsic business value.
However, it often overlooks goodwill and other non-physical attributes that may drastically affect overall business value. While there’s no strict formula, you can calculate the net asset value with total assets minus total liabilities.
| Net asset value = Total assets – Total liabilities |
Comparable company analysis
Comparable analysis is where you compare the target company to similar businesses to place a valuation benchmark based on market data. It can also be known as comparable company analysis.
It helps you understand your business’s competitive positioning and industry standards, helping understand the overall market value. It includes financial metrics from companies, such as P/E ratios and valuation multiples. This provides an understanding of competitive positioning.
Precedent transaction method
This is a business valuation method where the previous sales of similar companies are evaluated to understand benchmark value. This valuation process includes transaction details, acquisition prices and terms.
It provides real-world transaction data and gives more information on a company’s worth based on market trends and past sales. Ultimately, it helps you set realistic expectations for your business valuation.
Entry valuation
Entry valuation calculates the costs associated with starting a business from scratch, including startup expenses, asset purchases, and operational setup costs. It offers a baseline for business valuation based on turnover.
This method is particularly important for entrepreneurs and investors to properly understand the amount of capital needed to launch a new venture. This is then compared against existing businesses. Hence, it gives you a clear perspective on business value based on turnover and initial investment.
When should you consider valuing your business?
Understanding when to value a business is key; however, what are the appropriate circumstances that warrant a business valuation?
Below are the top 5 key situations where valuing a business is necessary.
Preparing for sale or acquisition
This is when you plan to sell your company or look for acquisition by another firm. A business valuation perfectly helps this scenario by determining an accurate asking price, which based on negotiations helps maximise profit.
If the owner is not seriously considering selling, a valuation may not be necessary on-the-go, but it’s still recommended to get a business valuation.
Attracting investors
This is a situation where you are looking for external funding or investment. Here, a valuation report informs investors of your business’s worth and future revenue potential. This immensely helps them make funding decisions. It’s important to note that if your business has not yet established itself a track record or revenue in the market, a valuation may not give you meaningful insights.
You are also legally required—under the Financial Services and Markets Act 2000—to provide non-deceptive and accurate information to investors.
Mergers and partnerships
In the case you are considering merging or entering into partnerships, a business valuation is a must. It helps all the key parties understand their contributions and ensures a fair exchange of value.
To protect shareholder interests, The Companies Act 2006 oversees mergers and acquisitions in the UK for proper business valuations.
But if the partnership is not legally binding or informal in nature, a valuation may not be considered.
Financial reporting and compliance
Sometimes, you may need to value your assets or business for financial reporting or compliance with certain accounting standards. This is why regular valuations are essential for accurate reporting of your company’s financial health to ensure compliance.
Specific instances are when The International Financial Reporting Standards (IFRS) and UK Generally Accepted Accounting Practice (GAAP) call for an accurate asset valuation in financial statements.
Business restructuring or bankruptcy
This is when your business is or might undergo changes or face financial difficulties. A proper valuation in this case informs decisions on asset sales, restructuring plans, or recovery strategies.
As per the UK law, The Insolvency Act 1986, you may need to follow its procedures for insolvency, where asset valuations are needed to determine the fair distribution of assets among creditors.
Get your professional business valuation with Mergers Acquisitions UK
Valuing your business can seem like a long process, especially for small enterprises or startups who are still navigating their market. At Mergers Acquisitions UK, we specialise in guiding you through this complicated process with strategies that are personalised per your financial goals.
Our team of experts has years of experience in the UK market, making us industry leaders in understanding market standards and benchmarks. Be it an exit strategy or knowing where your business stands, we can help!
We provide a range of services, including:
- Mergers & Acquisitions
- Leveraged buyouts
- Equity investments
- Exit strategy planning
Contact us today to get your business valuation done!
FAQs
Is business valuation different for small businesses?
Yes, business valuation for small businesses is different as they have limited financial data, unique market positions, and different potential for growth. Methods like asset-based valuations or income approaches may be more applicable, while traditional metrics may not fully capture their value.
How often should I get my business valued?
A business should get valued at least annually or whenever business changes occur. This can be mergers, acquisitions, or changes in management. Regular business valuations help you track business performance and prepare for sales or investments in the future.
Can a business be overvalued?
A business can be overvalued if its market price exceeds its intrinsic value. This occurs due to market hype, unrealistic growth predictions, or when business owners fail to consider economic conditions. Ultimately, this can lead to big losses if the market corrects.
What is the best formula to value a business?
The Discounted Cash Flow (DFC) method is highly regarded as it estimates the present value of expected future cash flows. Other methods include Price-to-Earnings (P/E) ratios and comparable company analysis.
How much should a company be valued at?
A company’s valuation depends on its revenue, profit margins, market position, and growth potential. Small businesses might be valued 1-3 times their annual revenue, while larger firms may be valued higher than 3 times their annual revenue based on market comparables.
How much turnover is good and bad?
A turnover rate between 10% to 15% is considered good or acceptable. Higher turnover rates indicate issues with the company culture or employee satisfaction. While low rates suggest stability, it can also show that there’s a lack of fresh talent in the organization.