Company valuation criteria and how you calculate it

A company valuation is invaluable for any private investor or organisation considering buying, selling, taking over, or raising finance into a business, providing insight into the organisation’s profitability and potential for future growth. A valuation helps prospective buyers and funders to understand a company’s worth and its capacity to grow in value and allows an informed judgement about how much return can be made while taking into account the operational and financial risks involved.

How to determine a company valuation

There are a range of methods that can be used to value a business. Most valuations use the two methods that are most relevant to the business in question:

1) Asset valuation – this may be appropriate if the business owns significant tangible assets, e.g. a property business.

2) Price to earnings ratio - this is an appropriate method for a business that is generating sustainable profits.

3) Discounted cash flow - by calculating the future cash flow, this method is often selected for businesses that have committed to sizable investments and are expected to produce a steady ROI over a long period.

4) Sales – the value of the business’s current sales ledger, contractual agreements, and in some cases, projected sales income

While each company valuation should be conducted on its own merits, there are three main criteria that affect company all valuations:

1. Future profitability – profitability analysis is used to model the effect of different scenarios and financial forecasts on the value of the business
2. Future cash flow – the potential of a business to generate a positive cash flow into the future using its current business model
3. Asset base – the value of property, machinery, vehicles, stock, business investments, and intellectual property owned by the business

Of course, the actual market value of a company will be the amount that a buyer is prepared to offer, but this can be difficult to quantify without first engaging with potential purchasers. As it can be beneficial to receive a company valuation for reasons other than disposing of the business, such as highlighting key areas for strategic improvement, other valuation methods are sometimes needed.

Whatever methods are chosen, it is essential that the valuers take the time to understand the business, its current and potential performance, and deliver due diligence.

Contact Arnold Hill & Co to arrange your business valuation

At Arnold Hill & Co, we have extensive experience of assisting businesses in a range of sectors understand the true value of their organisations, covering EMI valuations, acquisitions, and disposals. Please get in touch or call +44 (0)20 7306 9100 to find out more.

Image source: Unsplash