How to calculate the value of your business
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Published: 26 Jul 2021
A trading company or business valuation is normally based on the value of its future income.
Past Performance
The first reference point for any company to be valued is its record of past earnings, which forms the basis of how future earnings are assessed. For my valuation reports, I review the results for the last three years and adjust for any exceptional or non-recurring items of income or expenditure. A weighted average is applied to the adjusted results, which gives greater emphasis to the later years.
Applying a Profit Multiplier
The profit multiple, or number of times annual earnings, to be applied to the weighted average is normally between 3 and 7. So with weighted average profits of £250K, a company is valued between £750K and £1.75M.
Indexing
The main index that I use for the profit multiple is the quarterly index published by the accountants, BDO, for private companies and suitably discounted for the size of the company to be valued.
Also, in choosing the profit multiple, I consider three important factors, known as “The Three M’s”, that is, in order of importance:
- Markets
- Management
- Money
To put it bluntly:
1) If there is not a sufficient market for the company’s products or services, you might as well not waste an investor’s money.
2) If there is a profitable market, does the company have a competent management to run the company to service that market?
3) Are there sufficient cash resources to finance the company’s operations?
Item 3) always follows items 1) and 2) as money itself will not make a business.
For further information on the above do contact David Cane at [email protected] or phone 07749 080 806
