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Your business is one of many, and it can be challenging to determine its value compared to others. At last estimate, there are around five million limited companies in the UK. Naturally, UK businesses change hands every day following a negotiation period regarding the purchase price and conditions of sale. This article will explore some of the most common valuation methods to ensure a fair sale price for your UK company.
Valuing UK Companies
As we will see below, the best valuation method may depend on the nature of your business and which sector it operates in.
Naturally, picking an inappropriate valuation method may result in an unreasonably low sale price for your UK business, so it is vital to choose the best system. Many business owners obtain expert legal and financial advice for help with doing so.
Let us explore some common methods of valuing UK companies.
Asset Valuation Method
This should suit any business that owns many physical and non-physical assets.
Assets are physical and non-physical items that have their own financial value. As such, many refer to them as ‘financial assets’.
Some business owners are surprised to learn that a company valuation can include non-physical (intangible) assets. Some common examples of non-physical assets include:
- trademarks;
- copyright;
- intellectual property;
- trade secrets; and
- goodwill.
This valuation method adds the value of your business’ various assets and subtracts any factors that may decrease your business’s value. Negative factors that can reduce a business’s value include:
- ongoing debts;
- low goodwill; and
- a small customer following.
Since this valuation method is quite subjective, different advisors can produce alternative figures. However, done correctly, they should all be within a reasonable range of each other.
Naturally, this valuation system is best suited for your business if it owns many assets. If your company has few assets, this valuation method is unlikely to produce a reasonable value.
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Market Value Approach
The market value system compares your business to rival companies in similar industries and geographical areas.
So, if you operate a small independent car dealership in the North-East of England, the market valuation approach could consider the value of other similar small businesses. If there are five similar dealerships within thirty miles, the method may produce a figure based on the average business value of all five.
Naturally, the accuracy of this system will depend on the number of comparator businesses. The more similar companies in the geographic area, the more likely a fair value will result.
However, one of the main flaws of this approach is that all businesses are different. Just because local companies have a particular value does not mean that your business shares it. For example, your business could be the best restaurant in town and far exceed other competitors in terms of cash flow and customer base.
This valuation method is also limited when your business is unique and has no natural comparators to help calculate a figure.
Income Valuation Method
This is perhaps the most well-known business valuation method. Most prospective business owners are interested in future cash flow and profit. This method specifically explores current income and profit and future profit and income projections.
Most buyers and sellers welcome a focus on monies, but any prediction based on future events involves risk. An obvious example is the impact of the COVID-19 pandemic on UK businesses. Individuals who purchased a company in 2019 based on five years of solid profit may have experienced a different reality.
However, if your business grows and has strong future profit projections, this valuation method may produce a more pleasant figure than the others.
LegalVision’s Buying a Business: Guide to Negotiating Terms allows you to protect yourself by understanding which key terms to negotiate when buying a business.
Key Takeaways
Overall, the valuation method you choose for your company depends on your circumstances. Choosing the most suitable valuation system can significantly differentiate between a good profit and a disappointing loss. In this way, many business owners obtain expert legal advice in picking the best valuation method to avoid losing money.
If you need help valuing a UK company, our experienced business sale lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Yes, each valuation process constitutes guidance rather than a rigid calculation method. So, in the same way, that different car dealerships will value cars differently based on their valuation model, different advisors can produce varied sale values.
The usual method is to explain why the advertised sale price is an accurate valuation and push against any suggestion otherwise. Naturally, potential buyers may challenge the valuation process as a negotiation tactic.
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