'A business is worth as much as a willing buyer is prepared to pay and a willing seller is prepared to sell for.'
There are a number of different ways to value a business. Listed below is a brief explanation. However, please call 0845 1233907 for a more detailed explanation of your businesses value.
Methods of valuation
Although there are a number of methods of valuing a company, the following are most commonly used:
- multiple of the sustainable profitability of your company
- capitalisation of future cash flows. (less common)
Multiples of sustainable profitability
This method uses the technique of applying an appropriate multiple to the sustainable profitability for your business, thereby arriving at a sale value.
Adjusted Net profit
Iis your business's reported historic or projected profits adjusted for abnormal or non-recurring items (although expect any potential buyer to challenge the adjustments).
Calculating the multiple
Having established the Adjusted Net Profit, AMS will advise you of the appropriate multiple for your business sector and your individual business that should be applied to arrive at an overall value
Other commonly method used:
- price/earnings (p/e) ratio
- Earnings Before Interest and Tax (EBIT)
- Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA).
P/E ratio
Historically, the p/e ratio has been the most common multiple used in the valuation of companies. The p/e ratio is the ratio of the market value of the equity. This can be worked out pre or post Tax.
Earnings Before Interest and Tax multiple
The principle for the EBIT multiple is similar to that for the p/e ratio, but with interest added prior to the calculation of value.
This benefits high debt companies as a purchaser could have different financial structures and therefore different interest costs and different effective rates of taxation, because of the way the p/e ratio is calculated.
EBITA
Earnings Before Interest, Tax, Depreciation and Amortisation. EBITDA multiple removes any associated amortisation charges and therefore more accurately reflects the true underlying earnings of a business.
Whichever approach is used, determining an appropriate multiple for a private company is always going to involve a significant degree of opinion and subjectivity as only quoted companies have valuations which are readily accessible and which have been established by the market.
AMS has a great deal of experience in the SME sales market and this helps give a more accurate valuation through our knowledge of your business sectors and prevailing markets conditions.
