Valuing a Business

Valuing a Company or Business is more of an “art” than a science, however, there are various methods that can be adopted that are universally recognised.

Some business sectors have specific valuation methods that differ from the norm.

For most businesses, its value is determined using an earnings multiple. Earnings can be represented by profits at EBITDA (earnings before interest tax depreciation and amortisation) or EBIT or profit after tax. Publicly Listed companies are valued using PE (Price Earnings) multiples, this represents profits after tax.

Most commonly private companies are valued on either an EBIT or EBITDA basis. If EBITDA is used there is often some element of underlying capital expenditure adjustment involved, much depends on the capital intensity of the business involved.

The multiple used in the valuation is based on research of similar companies in a sector and also cross-referenced to listed company transactions, adjusted to take account of the depreciation, amortisation, interest and tax between a PE and EBITDA multiple, then further adjusted to take account of the lower liquidity of privately owned businesses compared to listed ones.

Other valuation techniques include considering the net assets of the business, adjusted for current market values of key assets such as property and equipment. Typically, for profitably businesses the net asset method will result in a lower valuation than an earning multiple-based one. The difference between net assets and the earnings multiple methods is “goodwill” inherent in the business.

Heavily capital-intensive businesses with low levels of profitability can result in negative goodwill. Net asset valuations should take into account breakup costs as well as revaluation upsides.

For businesses with predictable dividend streams, the dividend growth model can be used as a further alternative.

At Hart Shaw, we have considerable experience carrying out formal valuations for a range of reasons such as retirement planning, divorce settlements and shareholder disputes. We also regularly do “indicative valuations” as part of a larger transaction such as the feasibility of a trade sale, MBO or acquisition. We have acted for buyers, sellers and for the courts where expert witness work is required.