How much should I pay for the business which I wish to acquire?
What price should I accept for my business? What is the value of my business?
In any acquisition, disposal, part disposal, merger, investing of capital or passing on a business to another party some or all of the above questions will have to be addressed.
The answer to the above questions is of course subjective and depending on whether you are acquiring, selling, investing, passing on or inheriting a business you will have a different idea of value.
How do you value a business?
Utilising a number of quantitative business valuation techniques and focusing on a range of basic value drivers such as those set out below will assist in determining the value of a business.
Quantitative Methods of Business Valuation
- Comparison of the company to public company market values
- Comparison to the sales prices achieved for similar types of businesses in recent transactions
- Discounted Future Cash Flows expected from the business
- Determine the net proceeds which would be obtained from the (break up) disposal of assets of the company and the satisfaction of all the companies' liabilities.
- Recognise non-operating assets such as surplus cash or property as these assets may add additional value to the business and should be considered separately.
Value Drivers
- Trends in turnover of the business and market share
- Operating Margins achieved by the business in comparison to your competitors
- Trends in free cash flow
- Level of investment - under invested businesses attract a discount while an over invested business does not always attract a premium.
- Consistency of performance Management team. How critical to delivering the value drivers above? Are they staying or going? How can management be retained?
- Staff - Are they critical to the business?
- If so how mobile are they?
- Business size?
- Level of competition in the market and the outlook for the market.
- Technology capability and how technology will impact on the business in the future?
- Tax?
- Is the industry in an attractive industry sector?
- Number of potential trade and financial buyers?
- General Economic conditions?
BUSINESS VALUATIONS
When should I value my business?
The owners of businesses, who look at their valuations on a regular basis are able to identify factors which are impacting on value that need to be addressed. They are also able to identify opportunities to enhance the value of the business. They are assisted in identifying the optimum time to exit which may be today or at a later date because the overall value derived from the business is likely to be enhanced by continuing to work on the business.
Successful acquisitions, disposals and investments require realistic business valuations. Valuations should focus on all internal and external commercial issues relevant to the business.
Valuations are utilised to assist in carrying out negotiations to acquire or invest in businesses and how to maximise the value of their existing businesses. By monitoring performance and the dynamics of the markets they operate in, business can quickly re evaluated with a view to ensuring our clients exit the business at the optimum time.
If you require more information please consult your tax advisor or email us at tax@fixmytax.com.
