How to Value a Company

How to Value a Company

If you're looking to value your company you're either planning to sell or may be looking for investment to grow your business.

It's essential to accurately estimate the value of your business - if selling; you'll be clear about the value you expect to get from a buyer. If you're looking for investment, an investor will look positively on your business if you have provided an accurate valuation. If you've ever seen Dragon's Den, you'll know how poor valuations can affect an investor's decision!

There are a number of factors that can affect the value of your business:

• Finance - historical and project profit, cash flow and costs
• State of the economy
• Competitors - how much are your competitors (of a similar size) worth?
• Any patents or intellectual property that you own
• Strength of relationships with customers
• Value of assets and debt
• How many regular purchases/orders you have
• People - how loyal are your staff? Is the business dependent upon your personal skills?
• Reputation and brand name
• Marketing activity

The biggest factor that will affect the value of your business is, of course, how much a buyer is prepared to pay! They'll use the above factors to influence the price they pay however try not to over-value your business as this can really put off potential buyers and investors.

Methods of valuation

There are a number of methods you can use to value your business:

1. Multiple of profits

Average monthly/annual profits are adjusted to not include one-off factors like exceptional costs, one-off purchases. This will give you a good indication of immediate future profits. You'll then need to add on any additional costs or gains that the company may make after being sold or invested in. This final profit figure is generally called 'normalised' profits.

To find a suitable valuation for your company, multiply this figure by anything between 3 and 5 times (this is the norm). Be careful not to overvalue your company at this point - smaller businesses should be at the lower end of this scale whilst most larger companies with a strong reputation can be towards 8 times.

This method is generally used by businesses with a track record of profitability.

2. Asset valuation

Your accounts will show the net-book value of your business. That is total assets minus total liabilities. The values in your books may not take into account inflation, depreciation or appreciation - make sure your assets are valued at the current rate.

3. Entry valuation

How much would it cost to build assets, people, training, building up a customer base, and developing products and services?

4. Discounted cash flow

This method uses estimates of future cash flow to value your business. If you're predicting future cash flow, make sure you take into account rates of inflation. Many business buyers will use a discount rate of 15-25% to take into account changes in inflation.

If your business has stable, predictable cash flows this is probably the best method to use.

5. Rule of thumb

Different industries have their own rules of thumb that can be used to determine your business's value. For example, retail companies are generally valued as a multiple of turnover, number of customers, or number of outlets.

If you wish to find out more about freelancing as a sole trader then you may also be interested in the following pages:

• Benefits of Freelancing - the benefits to you as a freelancer and to your potential clients
• Sole Trader or Limited? - which route is right for you?
• Setting up as a Sole Trader Freelancer - what you need to consider when setting up as a freelancer
• VAT and NI - how do VAT and NI affect you as a freelancer?
• Freelancer Take Home Pay Calculator - how much more could you earn by going freelancing?
• Freelancer FAQs - all your questions answered