HOW TO VALUE A COMPANY
There are traditional aspects to consider when valuing a company – multiple of profit, turnover, comparisons with acquisitions in the respective industry – all of which are important factors.
The reality though is that the value of a company is determined by how much a buyer is prepared to pay for it. By creating competition and generating greater interest, the value increases – and that is an area where we at KBS Corporate excel.
HOW TO VALUE A COMPANY
WHEN TO VALUE A COMPANY
Any time is a good time to understand your company’s worth, certainly if you are beginning to think about selling it. Valuation can also be helpful to incentivise management and highlight areas of the company which should be improved.
The main reason for valuing a business is to help company owners sell their business, but understanding the valuation process can also help with the following:
- Improve value (real or perceived)
- Timing: indication of when a good time to sell/buy would be
- Ability to negotiate better terms for company exit
- Complete due diligence faster
- Complete a deal more quickly
- Wider buyer scope and better quality of buyer
- More accurate expectations for sale goals
- Raise equity capital
- Re-evaluation for new shares
- Motivate management or employees with shares in the company
A major benefit of valuing your company in the lead-up to going live on the market is for you to be able to set goals. An experienced adviser such as KBS Corporate will be able to assist with setting realistic aims for your company exit, accounting for potential circumstances that can fluctuate valuation and what a buyer will be willing to pay.
WHY IS ACCURATE COMPANY VALUATION IMPORTANT?
In setting realistic goals, as discussed above, you are less likely to sell your company short or face surprises if buyers will not pay what you expect.
An accurate business valuation can help in dealing with investors and buyers, giving all parties an opportunity to understand the company’s worth.
Awareness of your company’s value allows an expert adviser to determine a scope of fair selling prices, to negotiate quickly and effectively with suitable buyers only, and enables you personally to secure any applicable loans you may require.
HOW TO PREPARE FOR A COMPANY VALUATION
The main thing for a business owner to do in preparation for a company valuation is to get their finances in order.
Doing this effectively will speed up the process and could attract a better quality of buyers. Valuation experts and buyers alike will wish to study your company’s financial foundations.
Provision of the following documents will make for a successful and fast company valuation:
- Profit and loss statements
- Tax filings and returns
- Records of purchases
- Licences, deeds and premises documents
- A regularly updated overview of your company’s finances
- Credit reports
Not being able to provide these documents in an organised and timely manner would probably deter potential buyers. At KBS Corporate, we recommend providing statements for the last three financial years in which your company has operated.
COMPANY VALUATION METHODS
The following methods are what you may well find if you search online for ways in which your company can be valued. However, if you were to apply any of these formulae to your company, please remember they will only provide an indicative, notional valuation, and not a figure you should consider to be any sort of guarantee in the event of a sale.
At KBS Corporate, we avoid setting a valuation target at the outset of a company sale process. Instead, we simply set expectations by pledging to do everything we can to maximise the company’s valuation, by way of generating as much competition as possible among our unrivalled network of acquirers.
1. Times-revenue method
This method is ideal for valuing new or relatively new companies that cannot yet provide sufficient earnings and performance history.
That said, whilst this is a simple method, it is not the most accurate and does not factor in expenses and ability to generate a positive net income.
This method involves calculating the annual revenue and multiplying it by an industry-specific multiplier.
The multiplier itself is based on how slow or high an industry is moving, typically given a grading to multiply between 0.5 and 2.
Consult a company sales specialist such as KBS Corporate to determine an appropriate multiple.
2. Discounted Cash Flow (DCF) method
The DCF method is based on future cashflow projections, calculating what future cashflow would be worth today and using your findings to work out the company’s current market value.
This method is suitable for established companies that have stable and predictable cashflows projected for the next three financial years.
It is an ideal company valuation method to use for seeking investors as it is based on generating returns, which is the main focus when it comes to investment.
Apply a discount rate to account for unexpected expenses. If the calculated value is greater than the initial investment, then the DCF method could be a viable option.
3. EBITDA valuation method
A relatively fast method that delivers a general estimate of what a business is worth.
EBIDTA = Earnings Before Interest, Taxes, Depreciation and Amortisation.
This method consists of calculating earnings before interest and tax, divided by revenue to reveal the EBITDA margin.
To calculate EBITDA, add company earnings with the outgoings of interest, taxes, depreciation and amortisation back.
4. Entry cost method
This method entails calculating the cost of creating a similar venture from scratch, in order to determine a company’s value.
Imagine your business does not exist and you are forecasting the cost of starting your company.
A good starting place for estimating costs are: tangible assets, recruiting and training employees, advertising, and any research and development into your product and/or service.
Also consider any expenses you could cut if you were starting again.
By subtracting these potential savings from your projected start-up costs you will be able to determine the entry valuation cost.
In summary: Entry Valuation Cost = Projected Start-up Cost – Potential Savings
This method is fast but does not account for key intricacies of your company or any future growth, therefore is somewhat ideal for new businesses but not as ideal for those with a lengthy financial history.
5. Assets valuation method
This method, which can also be described as the Net Book Value (NBV) method, aims to understand your company’s value based on asset valuation, which is categorised into tangible and intangible assets.
Tangible assets are physical possessions that your business owns, such as an office, equipment, machinery and land, whereas intangible assets include any of your company’s copyrights, patents, brand and other intellectual property.
A deep understanding of what assets are worth will give you a greater sense of your company’s valuation.
Once you have a tally for the value of your assets, the NBV of your company is calculated by deducting the costs of business liabilities, debt and outstanding credit, from the assets valuation total.
This method also does not take into account any growth potential, therefore could be seen as a means of understanding your company’s minimum value – as goodwill, market value and bidding competitions are not considered.
WHAT FACTORS CAN AFFECT A COMPANY VALUATION?
Business age
Newly formed companies must rely on predictions – of future sales and profit – whereas established businesses should be able to base value from proven stats.
Companies with a proven track record are likely to be valued higher than a newly formed business.
Growth potential
Buyers will be looking for patterns of consistent, profitable growth.
Evidence of this can be based on your company reaching targets and objectives on a regular basis.
Assets
The ownership of tangible assets increases company value, such as office equipment, property, machinery and vehicles.
If only intangible assets are owned, such as trademarks and your company’s reputation, the business value will be lower.
Management
Stability reassures new ownership that the business will continue to operate with the same standards and company performance.
Forecasts of growth in company revenue and company margin are often testament to a solid management team.
Speaking to an expert adviser with an understanding of economic circumstances in each industry can advise on what your business should be worth, and how to maximise company value so you do not fall short when going live on the market.
HOW KBS CORPORATE SUPPORTS WITH VALUING A COMPANY
At KBS Corporate, we are experts in maximising company value.
Gaining an edge in the market and maximising company value is about going beyond the traditional methods mentioned above. The way this is achieved is by identifying relevant buyers and then nurturing their motivation – we want them interested and willing to pay more if there are other potential bidders ready to compete with them.
We offer dedicated, holistic support with complete project management from start to finish. Brokers, for example, often leave their clients once a deal has been agreed upon, and many of our competitors simply do not have the same resources as us to maximise company value, particularly in more complex cases.
We create competition amongst the interested parties we have gathered, which promotes and usually increases the company value within this pool. We identify the value drivers of a company that the higher bidders look for. An example could be current and future financial performance.
Our experts take the time to get to know our clients, which allows us to then showcase their company in the best possible light to the buyer pool we have collated. At KBS, we have the most comprehensive buyer reach in the industry and we do not shy away from driving competition within it.
Get in touch with KBS Corporate to speak to an expert adviser about your company exit requirements.
