How to value your company
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Published: 21 Jan 2021
You may have wondered how to work out the value of your company.
The problem is there are a number of ways to value a company. The method that is right for you is largely dependent on the type of company it is.
The companies that I value are all in the SME market and I normally use one of the following three methods.
Valuing a company that sells products or services
For a trading company that sells products or services, a profit multiple of the “average annual maintainable earnings” for the last three years is used.
This figure for earnings is taken from the accounts with adjustments made for:
- Possible understatement director’s remuneration that is taken as a dividend.
- Non-recurring or exceptional items.
- Possible cost savings in synergies created by the combination of the buyer’s and seller’s companies.
The profit multiple is usually between 3 and 7, depending on the competence of management, efficiency of trading operations and marketability of the product or service.
Valuing a Property Investment Company
For a property investment or investment company, greater reliance is placed on the asset values instead of income streams (e.g. rent receivable, dividend and interest receivable).
So the assets are revalued, from which the company liabilities are deducted. Also deducted is the potential tax liability on the surplus on the asset revaluation. This revised net asset value forms the basis of the sale price to be negotiated.
Valuing a Professional Services Company
For professional or service companies that have a strong link to their clients, the valuation is based on a factor of annual recurring fees. That factor is normally between 0.7 and 1.5.
However, the agreed valuation is normally paid over 3 years in two parts as:
- A non-returnable deposit on signing the sale contract and
- with the balance payable in proportion to the fees of the clients that remain with the seller firm in years 2 and 3.
Although the above gives formulae to be used in a valuation, the present market will tend to depress the sale price.
It may be a time to cut your losses by selling now in a depressed market and start again when the time is right. If you decide to continue trading, you can carry out all those measures to prepare your company for sale, so that you will be ready to press the sale button, when the time is right.
This article is for guidance only, covering the bare essentials on company valuations. When you plan to sell your company, it would be prudent to engage an expert in company valuations to ensure you gain the best price.
If you need any further information or explanations, please call David Cane on 07749 080 806 or send an email David.
