How should you value your company?

17.5.2019

 

As a law firm, we don’t carry out valuations of businesses. We as solicitors, however, are often involved in business valuation discussions. A friend at an accountant firm explained to us the approaches taken to value privately held businesses. There are three main approaches: earning multiples, cashflow analysis and asset based.

 

Earning multiples

 

This is the usual method. The overall profit for the owner is calculated from the latest accounts and then a multiple based on the company’s business category is applied to it. Small service related businesses generally have a multiple of 2 to 2.5 times, whilst small manufacturing businesses generally receive multiples of 3 to 3.5 times.

 

Cashflow analysis

 

Using a cash flow analysis, expected revenues and costs for usually five years are forecasted to arrive at expected annual overall profits for the owner. Then all future expected annual overall profits for the owner (into perpetuity) are estimated. A discount rate is then applied to each annual overall profits for the owner, which reflects the time value of money and riskiness of the business. The value of the business being the sum of all the annual overall profits with the relevant discount rate applied.

 

Asset based

 

Under the asset-based method, the individual assets of the business (eg property, equipment, stock and intangibles) are valued, with the sum being the value of the business.

 

Although our lawyers are experts in company and commercial law, for valuations we would refer you on to our accountant colleagues. 

 

We can help, please call 020 3871 8442 or complete a free online enquiry
 
Our solicitors will be pleased to meet with you at your business premises or at our offices.
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