Valuation is a methodical assessment and determination of the true worth of a business. Ultimately, in a business sale, valuation is the price the potential buyer is willing to pay and the seller is willing to accept; or the price the seller is asking and the potential buyer is willing to pay.
Valuing an enterprise is an immersive process involving all manner of transaction steps, activities, and endeavours such as due diligence, valuation, assessments, negotiations, bargaining and trade-offs between the seller and the potential buyer.
A company’s profitability, revenue, cash flow, earnings growth, growth prospects, brand recognition, intellectual property, all assets and liabilities as well as prevailing market conditions, demand and supply can vastly affect its valuation. But a valuation arrived at is largely dependent on the method used; what is being valued is as important as how it is being valued.
A good valuation is best achieved with a combination of any number of methods. Various methods used in business valuation include:
The valuation is calculated as a multiple of the adjusted net profit, EBIT or EBITDA. A specific multiple used in a valuation broadly depends on the type and size of the business, its industry and growth prospects.
As the term implies, adjusted net profit is net profit adjusted to account for certain costs and expenses not considered when calculating the net profit. For example, if the current owner-manager had not been receiving appropriate salary from the business.
When using adjusted net profit, the valuation is calculated as follows: Adjusted Net Profit x Multiple (of industry) = Valuation. The multiples of earnings approach is usually the preferred method of valuation of a lot of SMEs.
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In the early stages of such an important undertaking, it can be a bit of a moral maze: who do you trust?
Firm Gains gave me confidence with detailed advice and support. I would recommend their services to other entrepreneurs seeking to buy a business.Mr T Washington , Founder
I found it much easier to get my head around a business sale this way than talking to my accountant. You speak a language I understand!
Even though the whole process of selling seems daunting, I’ve got more confidence that I’m heading in the right direction.Mrs T Boothe , Founder
Thank you for your email and the excellent advice provided earlier this week. It was immensely helpful and has helped me to plan my future direction for the practice.
I would have no problem whatsoever in recommending your services in the future.Mr & Mrs Halldron , Co-Owners
Firm Gains were recommended to me and I was not disappointed. They were efficient, helpful and effective responding quickly to my request with all the facts that were needed to ensure a stress-free dialogue with our buyer.
What really helped was the advice over and above the valuation, which was immensely valuable and gave me the confidence to proceed. I would not hesitate in recommending them.Mr C Waite , Founder
We found the advice invaluable, which was clear and concise and felt your firm had a good handle on market trends and business sectors.
With also the backup of the secondary services, there was a feeling you had all bases covered if we wanted to proceed with our exit via Management Buy Out (‘MBO’).Mr D Wills , Director
Thank you for your advice. I was just about to sign up to the wrong kind of business agent for a company of our size, but read your post just in time.
I found a more serious partner, with experience in our industry and we’re already using the same language.Mr F Summerscale , Managing Director
We have been greatly impressed by the clear and impartial advice given to us by Firm Gains. After just an initial phone call we felt much better informed, with a new awareness of the many options available to us.
Firm gains understood our situation quickly and clearly and were anything but ‘pushy’. Refreshing compared to what we’d experienced before.Mr C Hutcheson , Managing Director