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There are many reasons why someone might need to determine the value of a business interest. It may be in connection with a business acquisition, part of retirement planning, estate planning, the raising of finance or it may be because of disputes.
Business valuations are not an exact science and consequently there isn’t a universal formula that can be applied to all circumstances. That said, there are methods to help determine the value, whether it be discounted cash flow, capitalised earnings or based around assets. The starting point is normally the governing documents to establish whether there is a specified methodology.
Understandably the more predictable the income stream, the less complicated the valuation exercise becomes, however there are always the external factors (‘curved balls’ if you like) that may affect those earnings. Examples might be new technologies or a change in Government and/or policy.
The basis of any valuation needs to be agreed at the outset, otherwise objectivity can be distorted:
What is being valued ?
Why is it being requested ?
Who has requested it ?
What date is the valuation to ?
Needless to say the availability of up to date, reliable information is key to a successful outcome. If management accounts processes are questionable or the entity has persistently fallen short of its forecasts, then basing a value around these metrics is likely to result in misleading conclusions.
In addition, depending on the composition of business assets, owners may need to engage the services of chartered surveyors or plant specialists, to further improve the output. Sure, its possible to rely on directors representations, however it becomes easier to challenge those assumptions without third party support.
Earnings Before Interest Tax & Depreciation (EBITDA) has long been considered as a simple approximation of cash generation and is routinely used when computing the valuation of a trading entity. That said, its also important to consider other aspects of the trade. A manufacturing or engineering business may have significant capital requirements, hence it might be appropriate to include an allowance for replacement machinery.
Established businesses have pre existing levels of cash, debt and working capital so it is essential to review those individual components to determine whether any adjustment is required.
The one unavoidable aspect to all valuations is subjectivity (a matter of professional opinion), and this applies to any market value adjustments or the multiple applied to EBITDA. Research is the key. Well reasoned assumptions are difficult to challenge.
Any business valuation is a blend of many factors and the valuation process doesn’t provide a ‘correct’ answer, however, it should provide a value based on the assumptions applied.
Our team have been involved in corporate finance transactions for over 25 years and have a wealth of experience in producing business valuations. If you would like to know more, please feel free to contact us:
T : 07977 409389
Please note WCF does not undertake fiscal (tax) valuations.
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