There are several good reasons why it’s essential to know your company’s worth.
In this article, we’ll walk you through the process of calculating the valuation of your company in the UK.
We’ll cover everything from revenue and profit margins to intangible assets and employee retention rates.
By understanding how to calculate your company’s value, you’ll better understand what it’s worth on the open market.
Why you should value your business
There are many benefits to valuing your company. Whether you’re looking to sell or expand, a company valuation is a valuable service that Smith Butler can provide.
If you want to buy or sell a business
Knowing your company’s worth is an essential first step when looking to sell or buy a business.
Having an official valuation will give you a clear picture of your worth, meaning you can set a realistic and fair selling price.
The same goes for when buying a company. If you’re looking to buy out another company, the valuation process will help you understand your capital for the acquisition and if you’re not overpaying.
In order to raise capital
Sometimes you may be looking to raise extra money to invest in your company. A company valuation will make it more likely to secure funding from investors as you’ll be able to put an accurate figure on your company’s net worth.
If you don’t know this, you may look unprepared or potentially a financial risk.
Uncover areas of the company to improve
A valuation can help identify areas of the company where processes aren’t running as efficiently or as profitably as they could be. This will allow you and your management team to focus on the more important issues your company is facing.
The factors that affect company valuations
More contributing factors determine your company’s worth apart from assets and stock. These include:
- your company’s valuation
- the value of your trade and customers
- any trademarks you have
- the strength of your team
- the circumstances of the valuation
- the age and risk of the company.
Ways to calculate your company’s value
You can approach your company’s valuation in many ways. Here are the options.
Price-to-earnings ratio
Price to earnings ratio (P/E) measures a company’s current share price relative to its earnings per share. Investors usually use this method to determine the value of the company’s shares.
This process will determine whether a company’s shares are overvalued or undervalued, which can be benchmarked against other stocks in the industry or the broader market.
Entry cost valuation
This is one of the most straightforward ways of valuing a company.
First, you’ll begin with your startup costs and your company’s tangible assets. You’ll then have to put a cost on the development of your products, training costs for staff and the cost of building up a customer base.
Once you’ve totalled those costs, you’ll have to think how much you could’ve saved at the beginning, whether that’s by having cheaper premises or buying cheaper materials.
After all of this, you will have your entry cost.
Discounted cashflow
While entry cost is one of the most accessible ways of valuing your company, discounted cashflow may be one of the most complex.
Discounted cashflow will require you to look at forecasts based on your previous business. This in itself can be very unpredictable.
You calculate your current value of each future cashflow using a discount rate, including any potential risks and time value of the money.
The idea of time value of money is based on the concept that the money you have today is worth more in a week’s time.
The discount interest rate for this method can range from 15% – 25%.
Industry valuation rules of thumb
Certain rules of thumb tend to be industry-based, so they can vary depending on the type of company.
The valuation won’t just focus on profit but on other factors like business turnover, the number of outlets and how large the customer base is.
Goodwill can also be brought into the valuation. Sometimes, a company’s goodwill could be worth more than a discretionary cashflow, so it’s worth considering.
Asset valuation
A well-established company with lots of tangible assets are usually the best suited for a valuation based on its assets.
To carry out an asset valuation, you will need to work out the company’s net book value (NBV). This will include all of the assets recorded in the company’s accounts, such as property and equipment.
Not only will you need to value the assets at book value, but you will also need to adjust the figures based on the quality and condition of the assets.
Things depreciate over time in value when they are used. Stocks also drop in value depending on the company’s history or the performance of the market.
What about intangible assets?
There are some things which are hard to value during the valuation process. Intangible assets cannot be measured but can have a large impact on the value of your company.
The relationship between suppliers and customers is a cornerstone of a company’s success. Maintaining these relationships is important to keep your value steady.
This also applies to the strength of the management and team. If someone’s buying your company, but their team is less experienced, this could lead to a drop in value.
Risks greatly impact a company’s valuation from the buyer’s perspective. If there are poor systems in place, you’re likely to encounter issues with the company’s operations which can hinder productivity and, in turn, lose money.
Get the most from your company
The experts at Smith Butler have years of experience when dealing with company valuations. If you are looking to acquire a company or sell your own, we can also help with your business strategy, making sure you get the best deal and have a plan in place for the future.
Get in touch today to find out more.