How do we value a business?
A business is valued according to its estimated worth to a purchaser. Inevitably certain assumptions have to be made in this estimation, but fundamental to the calculation is an assessment of the profits that the business will make after a potential sale, the ‘sustainable profit’.

Historical profits therefore only form part of the calculation as a guide to what the company will make in the future.

In the calculation of sustainable profit, adjustments will need to be made to allow for the following:

Excessive remuneration of directors and owners including dividends
Exceptional material expenses and income that are not expected to recur
Trading relationships with related and other parties that are not expected to
•••••continue after a sale
Expenses and income that relate to balance sheet items that will not continue after
•••••a sale e.g. goodwill amortisation and excessive interest receivable
Expenses that are not currently being incurred e.g. if the business is not being
• •••charged a fair market rent by a related party

Methods of valuation
Trade Ruled of Thumb – some sectors have their own formula to value a business
Discounted Cash Flow – future expected cash flows from the business at present day value
Price Earnings Ratio – the value of the business is a multiple of earnings (or profit)
Assets & Goodwill – a valuation of the business’ separable parts
Return on Investment – what an investor might be prepared to pay given a required return

Business v Share valuation
A business valuation concentrates on the fixed assets, stock and goodwill required to actually generate the profit
A share valuation will adjust the value of the business to take account of its remaining assets (debtors and cash etc.) and liabilities (creditors and loans etc.)

Minority interests
It will often be the case that only some of the shares are being sold. In this case additional consideration will need to be given to any potential discount to be applied to the shares to reflect any limitations on control of the business and the shares. Particular attention will need to be paid to any shareholder agreements in place. We will calculate a valuation using at least three methods and advise you on the most appropriate for your business circumstances. We highlight the difference to you between a business and a share valuation and explain the implications.

Other factors There are many other factors that will affect the valuation including: Variability of profits Length of trading General market conditions Business sector Size of company Involvement of owners Customer profile