Understanding how much a business might be worth by reference to its profits, assets, and how it can be made more valuable, is vitally important to anyone buying, selling, or simply running a business.
What does the formal valuation of a business entail, and why should you consider entrusting our company valuations team to give an honest appraisal of your business?
What is a business valuation?
A business valuation is influenced by how much return a buyer can generate, balanced against the risks involved.
At a simple level, a business valuation follows an uncomplicated formula: the value of all assets minus the liabilities. Business assets are any items that have value which can be converted to cash, including property, vehicles, equipment, and stock inventory. However, a true valuation considers other important factors, such as the past profitability of the company, potential for growth, the quality of customer relationships, and intellectual property.
A business valuation will also consider the ways in which a business can be made to be more valuable, such as the potential for organisational restructuring, or market opportunities. This provides important insight for prospective buyers but is also critical for existing owners who are exploring ways to maximise their organisation’s profitability and growth.
4 reasons you should consider valuing your business:
1) For transactions in business ownership
By benchmarking the value of a business, you can identify a suitable time to make a sale or purchase, negotiate preferential terms, or implement strategies to improve its value in anticipation of a future sale. Like property transactions, if all parties in the process have a realistic and informed understanding of the value of the business, there’s a higher chance of completing a sale quickly.
2) For staff executive schemes – such as employment management incentives
The valuation of securities for the purpose of EMI’s, unapproved options and growth shares is imperative to ensure that they have the tax treatment that you expect. Valuations should generally be agreed with HMRC to obtain certainty.
3) For raising new capital to grow the business
A realistic and up-to-date valuation can help inform the price of new shares that are to be issued, avoiding the risks of overinflating or underinflating the price. By setting the price of shares too high, it will prove difficult to sell them, while a low price will cause more of the company than necessary to be given to the investor (excess dilution).
By agreeing the value of the business, you can also encourage the sale and purchase of company shares at a fair price – a facility that is particularly important if you are keen for shareholders to be more deeply involved in business operations.
4) For probate reasons and/or rebasing dates
Where business assets are held by a recently deceased person, their value plays a significant part in the value of the final estate, so a company valuation will help to determine this as part of the estate management and probate process. Probate will not be granted by the Court until HMRC are satisfied that all relevant taxes have been paid. Where shares need to be valued in a private company, an expert opinion by a specialist is necessary as it can be difficult to assess their worth.
Contact Arnold Hill & Co for specialist business valuation
For advice on how to determine a company valuation, please speak to our expert business valuation team at Arnold Hill & Co today.
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