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Business Valuations

The biggest mistake some owners make is in not getting the right advice. They may decide their business is worth £10m, only to learn too late that they could have received £20m for it

Time and time again we are asked what a particular business is worth if bought or sold.

The valuation of a business can be where a set of laid down procedures are used to estimate the economic value of an owner’s interest in a business. Most business owners will need a valuation of their business at some time during its existence, especially when they want to determine how well the business is performing and whether or not it is achieving its potential. There are many other reasons why a company might request a valuation - it can be used in a financial setting to determine the value of the business when it is to be sold but equally a valuation is often required during divorce litigation, to settle disputes related to estate and gift taxation, for tax planning, business mergers, for assistance when negotiating with tax authorities and even pension planning. Valuations are also required when the pricing of share issues is necessary, where the business is making preparations in advance of an IPO or a stock market quote on the valuation of target companies during an acquisition. We can provide valuations where there are shareholder or matrimonial disputes and also in connection with claims for damages or insured losses.

So, it pays to concentrate research into who is interested, why, and how much do they pay for businesses, in order to reach a valuation. We at Shaikh & Co work with our partners, who are research analysts and other appropriate professionals, in order to assist you. We always work closely with you the business owners and our partners to assist in getting a very good view of the key strategic potential purchasers that would be interested in making you an offer, studying what kind of prices they paid for businesses in the past and gauge their level of appetite, competition and the attractiveness that a particular business has to them. Clearly a business where there is only one potential buyer in the ring is probably going to be valued at less than a business where there are seven interested parties. It all comes back to the potential purchaser’s appetite and not as general as looking at comparable deals or comparable multiples.

There are a lot of theoretical ways to value a business – there’s no ‘right’ way, although you could probably come up with several wrong ones. Ultimately, the business is worth whatever you think it’s worth, based on the criteria you set forth and what someone is willing to pay for it. But you can make your estimation by using several different ways and then choose the mix that reflects your final value estimate.

Some people prefer to value a business using the asset-based method – this involves putting a value on things like machinery, buildings, products and stock, raw materials and intangibles like the ‘brand’. Adding up the total of all these gives the value of the business however, this is not a method that can be used for small companies because they usually do not have an extensive enough asset base.

Here are the four most popular methods which are used to value a business:

  • Asset based – A process which values the business based on the open market value of its liabilities and assets
  • Dividend yield – An exercise which calculates the businesses value by assessing the future dividend stream and a dividend yield which would fit the risk profile of a willing seller/buyer
  • Price earnings – A process which involves the assessment of future maintainable after tax earnings by way of using a price earnings ratio that would fit the risk profile of a willing seller/buyer
  • Discounted cash flow – An exercise which calculates the value of a business by discounting the future cash flows by an appropriate discount rate

Sadly revenue is not the same as profit – if you doubt that then take a look at Amazon.com – they had sales in 2002 of $4 billion but they showed no profit. In fact, Amazon.com hasn’t declared it has made even one cent of profit since its inception. How much would you want to pay for a company that was declaring turnover of $4 billion per year that required pumping in an additional $380 million per annum just to keep it solvent?

Bear in mind that all these techniques consider only the financials, and non-financial considerations should also come into play – for example you might need to pay more for a tea shop if it’s next to a restaurant you already own as the potential seller would know that you will profit from the combined business.

Apart from valuations for the purposes of buying and selling, we at Shaikh & Co are also experienced in handling a variety of other valuation issues including the valuation of shares, share options and intangibles. It is becoming increasingly more frequent that companies find it necessary to carry out Annual Impairment reviews. We use a variation of techniques, methodologies and experienced-based judgement together with our knowledge of the governing standards to arrive at appropriate valuations.

Some reasons why Businesses are valued:

  • Acting as an expert witness
  • Arm’s length valuations for tax purposes
  • Breach of warranty claims under a sale & purchase agreement
  • Business sales and acquisitions
  • Fair value of intangible assets
  • Fiscal valuations
  • Purchase price allocation
  • Raising equity finance
  • Share based payments and share options
  • Shareholder disputes
  • Transaction based valuations
  • Transfer of assets within a group
  • Valuation of assets and liabilities in accordance with IFRS, UK GAAP and US GAAP
  • Valuations for capital gains purposes
  • Valuation of investments
  • Valuations under the Takeover Code

For whatever reason you need your business valued, Shaikh & Co are fully equipped to carry this out for you and also help to arrange funding. Why not come in for an initial, no obligation discussion?

Next Step:

Please contact us if you need further advice, have any questions about our services, would like a free consultation or a fixed fee quote.


Shaikh & Co Accountants

10 Decimus Park, Kingstanding Way, Tunbridge Wells, Kent, TN2 3GP - Tel:01892 552696