Morgan Cox carries out hundreds of business valuations per year.We are specialist valuation consultants and have a track history or excellence in this field.
There are many reasons why you may need a goodwill valuation carried out by an independent expert. These include incorporation, probate, divorce, change in ownership, buy in by a new partner and various others. We are highly experienced in calculating the goodwill value of your business in the current marketplace. Our valuations:
Contact us to arrange a valuation of the goodwill in your practice or business. Read on for details about current methods used in the marketplace and why you will need experienced third party input to give you a real figure.
Full written Business/Professional Practice Valuation Service Cost = POA
It may be the case for example that you want to sell out to your business partner or have a proposed management buy in. The sticking point may be the independent valuation of the practice or business. It may also be the case that you require two or more valuations in order to agree a purchase price. We can provide you with an independent valuation. We will need visit your business and discuss how your business works. We will also need to review the last three full sets of accounts. Once we have this information we can provide you with a valuation report. This will be sent to you within 7 days following our visit.
There is a one off fee for our practice/business valuation service. The cost of this service depends on the nature and complexity of your business however we have been told that we offer one of the most competitive rates available on the market. We are also commissioned by lenders to perform valuations on businesses whom have applied for loans and welcome approaches from the major lenders to carry out this service.
How to perform a Business Valuation? How do I Value my Business or Company?
Performing a business valuation is an art, not a science. Here is a free no nonsense guide on the different methods there are to value a business or company. There are a number of methods that can be used to carry out a business valuation so that thee valuation is based on more of a factual basis. One of our consultants was recently quoted as saying "There are 3 business valuations. The sellers valuation, the buyers valuation and the correct valuation". It is only when both parties believe that they have value in a deal that satisfaction is achieved and that an eventual sale of a business occurs.
In this helpful article one of the Morgan Cox valuation consultants will outline some of the methods used to carry out a business valuation or indeed company valuation and some of the pitfalls associated with each of these methods.
1) The Non Specialist Business Broker
You will be strongly advised to find a specialist in your business market to get an accurate valuation. More often than not, a generic business broker is engaged. Some of these will offer a unique selling point of a free business valuation. These are initially attractive as you believe that you can obtain the information that you require at no cost (initially). There will certainly be a cost to this process as is explained later. You may be told that a business is worth what someone is prepared to pay for it and that price at which you are prepared to sell the business for. You must also be aware that a goal of the business consultant or valuer will be to sign you up and engage with the services of the business broker. As many operate on a no sale, no fee basis they will be keen to give you a sub-market value for your business. This may be a valuation that they know will generate interest and lead to the quick sale of your business. You will however pay the "cost" of not achieving the market rate for your business. The broker will be looking for a sale in order to generate commission. The only loser will be you with the buyer and the broker getting the best deal.
Learning Point: As with most assets in life, you get what you pay for.
Action point: Use a specialist broker from the outset. You will undoubtedly get more money back than the money spent performing an informed valuation in the long run by a specialist.
2)The Net profit valuation method
This is one of the most commonly used methods to value a business. If you look at the bottom of your profit and loss statement on you last set of annual accounts, you will find the net profit for the financial year. This is after all costs, wages and taxes ect. Each industry or market will have a different multiplier or range multiplier to apply to this net profit in order to achieve a valuation figure or range. The level of risk within the business also plays a part in determining the multiplier to be used. For example a new company with only 3 years trading history has a larger risk profile when compared to a similar company with a 20 year history and will have a smaller multiple applied to the net profit. Smaller companies with a lower turnover and profitability also carry a smaller multiplier. In this example the 3 year old business may have a multiple applied between 2-4 whereas the older company may have a multiple of 4-6 applied.
There are industry rules of thumb here as well which is why it is important to speak to a valuation consultant who is a specialist in your market. You wouldn't want them to sell your business on a multiplier of 3 when in fact the market norm is 6. Essentially you would be selling your business for 50% of the market value.
Just to confuse matters now there is also a term known as "adjusted net profit". Most owners of small businesses may put through costs that are nor 100% associated with the business. For example personal mobile telephones, travel expenses and use of a home office expenses are sometimes but through the books but really shouldn't be. Once the non essential items that go through the books are identified then these can be added back into the P and L statement in order to come to an adjusted net profit, which can then be multiplied by the agreed niche industry multiplier.
From a purchasing perspective particularly with smaller companies it is important to find out if the directors or owners have taken salaries. Most smaller company owners don't take a salary or take a minimal contribution with the rest paid in the form of a dividend. They may have been advised by their accountants to do this as traditionally it is the most tax efficient way of taking money from the business. If you are buying a business with a view for someone else delivering the services you will need to factor in these salary costs and hence the adjusted net profit calculation may in fact be lower.
A quick point of economies of scale. If the purchaser currently has a business with staff who have capacity to take over some of the functions of the service delivery then there are economies of scale. To the purchaser the costs of delivering the new companies services can be absorbed with no additional cost into their existing business. The net effect is to make the business more profitable, well above the valuation that may be placed on it.
Learning point: Adjusted net profits and not the same as net profits. They can be adjusted both up and down.
Action point: Get an accountant to look at the books or engage the services of a professional valuation consultant. Figures can be massaged and it's important to understand that the valuation has been carried out correctly.
3)The price to earnings ratio method (p/e)
You may be familiar with the p/e ratio valuation model from FTSE 100 companies or from your experience with investing in shares. If Company A in the FTSE 100 has 100 shares allocated and these shares trade at a value of £1 then the p/e valuation would reflect a valuation of £100. Realistically there are normally millions of shares that are issued and that are traded so these companies are valued on the billions of pounds region however we have simplified the equation to make it easier to understand.
If you look at the FTSE, the average p/e ratio is approximately 14. For technology companies this is higher in the 18-22 range. This is because investors believe there is a greater potential of return in the technology sector than other companies operating in different markets.
The p/e earnings ratio method is similar in principle to the net profit multiple method. In practice, for SME's and small business valuations, these businesses don't trade on the stock exchange so this method is of little value. Going back to the risk of the business, as these companies are established multi national companies with a broad trading history and multiple products, lots of customers then there is a much smaller risk to these businesses than the SME. As a result the multiplier is much lower. It can be interesting, however to look at a trading company in a similar sector, to ascertain the p/e ratio that it trades at.
4) Asset valuation method
This is also not the best method to use to value a small company of business. If you add up all the assets of the business and subtract the outstanding liabilities then you are left with the net assets. This can sometimes be used as a valuation such as with property investment companies. Here the assets of the business are real and can be calculated using this method. In practice most smaller companies have very little in the way of fixed assets (say computer and office equipment) so it's not the best method in practice.
5) Entry Cost Valuation method
How much would it cost you to start up a similar business in the same market and get to the same level of trading and profitability? The cost associated with this exercise is deemed the "entry cost" and essentially gives a figure that can be used as a valuation. It is notably difficult to calculate however. For example if the company had 1000 clients how much would it cost to acquire 1 customer from marketing costs. If it took £1000 to generate multiple leads that resulted in 1 client then the entry cost valuation would be £1million in this example.
6) Net present value method
This is also not a great way to value a small company or business. It essentially means the net book value of the company PLUS known future revenues. For example if a software licensing company had 1 product that was licensed for the next 10 years at £1million per year, then the net present valuation would be £10million plus the tangible assets of the business. Some would argue this point, as the business has 1 contract which means risk, which in turn means a reduced valuation. The principle however can be applied.
7) Sector benchmarking method
This is really the realm of the real estate industry however this method can provide some excellent information for niche market valuations. For example if you own a house in a street of 40 identical houses, your house may be worth what the other houses have recently sold for in your street. If 3 identical houses sold last month for £500,000 each then it may be sensible to assume that your house could sell for a similar value. Wrong. It is only a guide. For example the 3 houses recently sold could have been owned by the same vendor who needed to liquidate some cash for another reason and put all 3 houses up for sale at the same time. Because it may have been a forced sale (time sensitive) these houses may have been discounted to attract a quick sale. This situation is highly unlikely however.
In niche markets, a specialist broker will be able to tell you what similar businesses (market, history, turnover, geography) have sold for however as indicated, a business selling in London may achieve a higher value than one elsewhere. Each story is different as is each business, however this information can be very useful to ascertain what is actually happening in the market.
In summary, there are many different methods to value a company or business. Some may be better than others, however this is very complex calculation and there is not always a simple formulae that can be applied to give you a simple valuation figure. From experience it is important that you speak with someone who knows what they are doing. This may not necessarily be your accountant as they may not be specialists in your field. They are however a good place to start.
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