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How Are Business Valuations Undertaken?

Written by: Anthony Spencer on Monday 08/02/2016

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As of 1st June 2016, all business and commercial valuations will be serviced under the trading name of Eddisons Taylors.

Business valuations are one of the most important, yet most frequently misunderstood, aspects of the life-cycle of a business. There are many reasons why a business owner may seek to have their business valued, including buying and selling, the transfer of shares, when seeking finance, as part of a programme of restructuring, for insurance reasons, or for accounting or tax purposes. We take a look at the process in more detail.

Why Value a Business?

Fully understanding the true value of your company is vital in order to make informed decisions and plan for the future. It helps to prepare for unforeseen eventualities such as illness or incapacity; it gives you a competitive advantage in the expectation of an expansion or merger; and it stands you in good stead if you’re planning an exit strategy.

There are three main methods of business valuation; asset-based; cash-flow based and comparative value.

Asset-based valuation

This type of valuation looks at a company’s net asset value and deducts its total liabilities. In most cases assets will be classed as premises, machinery, products, components or stock in addition to intangibles such as the value of the ‘brand’. Asset-based evaluation looks at a company’s fair-market value and asks the question of how much it would cost to rebuild the business from scratch from which a figure is arrived at.

Cash-flow-based valuation

A cash-flow-based valuation relies on forecasting future costs and revenues to calculate the expected net profit. This model is then run as a projection for the required period of time (usually five years and sometimes longer) and a terminal value is calculated. Programmes which calculate these figures also take into account a discount rate which reflects business risk and the value of money over time, to give as accurate a figure as possible. This method is regarded as the most precise way of valuing a business but it presents many complications and can be prone to inaccuracies if not handled by professionals.

Comparative valuation

This simply involves looking at another company which is similar to yours and basing the estimation of your value on what is perceived to be theirs in the current market. This can work well when such a business has recently been sold and the transaction figure is available, but will not take into account multiple variables which are specific to their business alone.

It is recommended that business owners have their companies valued every year but many have never undertaken the valuation process at all. This leaves them vulnerable to outside forces, market conditions or internal change. There are several pieces of valuation software which can assist in calculating a basic value for your business but the results can be inconsistent without expert guidance. It is, therefore, in your best interest to engage a team of specialists who can provide you with professional advice within the framework of current legislation, tax rules and financial and market conditions. At Eddisons, our specialist staff have vast experience in business valuations in order to be able to offer a comprehensive and up-to-date service to our clients for their complete peace of mind. If you are interested in business valuation, please contact a team member for more details of the process, and don’t leave it to chance.

 

Fully understanding the true value of your company is vital in order to make informed decisions and plan for the future

Written by: Anthony Spencer on Monday 08/02/2016

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