Key criteria for business valuation assessment
Determining your companies worth
Understanding the true value of your business represents far more than simply putting a bottom-line figure on the finances, assets, inventory, etc. While it may enable you to determine the ‘worth’ of your company – particularly important when looking into a possible sale – establishing an accurate business valuation will also help you make informed business decisions, influence key investment opportunities, settle outstanding debts, and support the development of future growth projections.
It should be noted that how one determines a business valuation is very much dependant on the reasons why it’s being conducted. For instance, we mention above that the possible sale of your company may prove the catalyst to carrying out the assessment. But if your aim is to source outside investment, expand into new territories, or even to enter the process of liquidation and the winding up of your business, the objectives of your assessment need to be clear.
So, what are the key criteria for completing a SME business valuation assessment and what questions need to be asked when beginning the process? First and foremost, it pays to understand precisely what a business value assessment actually is.
What is business value assessment?
“What is my business worth?” It’s a question that many business owners will ask themselves and there’s no single way to answer. Business value assessments look to understand and define the value of an organisation according to a set objective. After defining the goals of the assessment, the hard work of collating all the required information begins.
The most common scenarios for conducting such an assessment are:
- Sale of the business: If the objective is to sell to the highest bidder, your value assessment will seek to determine the fair market value i.e. a monetary amount that both you and the purchaser are in agreement with, over the transfer of the asset.
- Procurement by larger corporation: If you’re attracting interest from a specific, bigger organisation that wishes to develop your products/services on a grander scale and take your SME to the next level, it will be prudent for the business value assessment to follow the rules of the investment standard measure. This metric will provide an accurate value tailored specifically to a particular level of investment, as opposed to the broader calculation used in fair market value assessments.
- Forced liquidation: If you’re in a position whereby settlement of debts to creditors has become impossible with the cash reserves you have available, you can find yourself in a position to seek a buyer as quickly as possible with business assets being put up for sale to accommodate payment. Such a situation invokes the need for a forced liquidation value to be calculated, under the assumption that said assets will no longer be used for the generation of revenue.
These very different scenarios demand different calculations, and it is often the responsibility of independent, third-party business valuation experts to manage the collection of relevant data and information to make the most accurate assessment possible.
What to consider when analysing your company’s worth
A number of factors play a role in assessing your SME company’s value. The starting point comes with maintaining accurate tax returns and comprehensive financial statements. Not only do these demonstrate the success of the business in the past, but they will also form the basis for projected performance. Combining these with clear documentation around the business operations, strategy, goals, and presenting an outlook – and where possible, a roadmap – for future successes will contribute significantly to assessing your business’ value.
For any SME business, it’s worth remembering that financial statements need to also take into consideration adjusted net profit in order to accurately return the value of your company. Selected add backs (those expenses and adjustments relevant to current management, and which include items such as PAYE, salary, cars, pension and health cover, payments to additional directors not part of the management team, etc.) should all be calculated alongside the main key financials, as they will play an integral role in the calculation of the value.
Of course, a customer/client base is integral for any company to succeed. Therefore, conducting an audit on your target audience and existing client list will help you identify where the major revenue streams originate. The growth from SME to large organisation often depends on being able to maximise earnings from a large number of customers, as opposed to relying on a limited number of higher-paying clients.
Assessing your company’s value
As noted above, every penny – and many intangible elements – will all be factored into the calculation of the value of your business. The calculation itself is dependent on the purpose of the assessment but the most common used is simply:
[Adjusted net profit of business] x [Multiplier of industry] = Valuation
The key variable in this equation is the multiplier. A number of factors already identified will influence the value of this figure, including:
- Industry sector
- Profit margins
- Balance sheet
Although there is no hard-and-fast rule to determining this figure, it has been suggested that for SME businesses, the multiplier can vary from 1 x adjusted net profit to 10 x adjusted net profit. Accordingly for a business with £250,000 of net profits, taking a moderate estimate of 5 x adjusted net profit, the business valuation could well be:
£250,000 x 5 = £1,250,000
Find out more on how to determine your business valuation
Establishing an accurate business valuation is no simple task. As such, leading business valuation experts are available to help you assess your current status and potential for sale or growth. To find out more about business value assessments, contact THP Chartered Accountants today. Our experienced team works with companies across the South East (with offices in Cheam, Chelmsford, London City, Saffron Walden and Wanstead) and will be able to provide you with an accurate valuation that will help you determine the future of your business.