Although valuation isn’t always an exact science, writes Ryecroft Glenton’s Carl Swansbury, it can be an essential part of your long-term business planning.
In my experience, clients can have any number of reasons to look for a valuation of their business. Sometimes it can be a personal matter – they’re going through a divorce, for instance, and need help with litigation. On the other hand, they may be thinking about changing the ownership or structure. We may, of course, need to value a business after death. And then there’s perhaps the most obvious reason of all: a valuation with a view to a sale and exit from the business.
It’s possible for a valuation to be conducted on an open-market basis, but you also get valuations for fair value and fiscal valuations too. It’s also important to consider the very particular issues presented by quite different types of business.
It’s actually quite usual for businesses to be valued in a number of different ways and it may well depend on the type of business we’re talking about. If I were valuing, say, the business of an Independent Financial Adviser or looking at an accountancy practice, I’d be calculating a multiple of recurring fees. With something like a pub or nightclub, on the other hand, it’s different. There, you’d be looking at the annual turnover and applying a multiple, while also taking into account whether the client had a freehold or leasehold.
As well as trade-specific bases there are various other options. The most common is multiples of profit, but there is also dividend yield or a calculation based on net assets.
No single valuation approach will fit all businesses and the rationale for valuing a business is not always the same. Each valuation presents different factors that need to be taken into account.
Ultimately, of course, a business is only worth what someone is prepared to pay for it. Sometimes, a business might be wholly dependent on the expertise or hard work of one person and actually there’s little intrinsic value once that person is taken out of the equation. With larger businesses, there might be brand value in a name – although that can be difficult to quantify – or perhaps a stream of revenue from intellectual property.
One thing I always stress to my clients is that it’s really worth investing in the due diligence that goes with a proper valuation. If you’re planning on using the figures to pave the way for an exit strategy in, say, five years time, they need to be as accurate as you can make them.