How Will My Company Be Valued?

If you are a business owner, your company will most likely be valued at some point. Reaching a company valuation will often involve an independent professional valuer. However, you can use some valuation methods to reach a good estimate for your company’s value without hiring a professional third party. 

This article will explain some of the critical considerations that will go into the valuation process that determines your business’s present value.

Why Value My Company?

Finding the market value for your company can be helpful in a range of situations. For example, it can be beneficial for:

• setting a fair share price: this can be good if your employees want to buy shares in your company or if you are setting up an options pool; 
• filing your taxes: you may need to provide valuation statistics on your tax return;
• selling your business: naturally, the market value of your business is important if you are selling it;
• securing any investments: investors will want to see a realistic figure, and they may ask for your valuation method in reaching your business valuation; and
• if you want to buy out an existing partner within your business.

What Considerations Go Into My Company Valuation?

The first things to look at will be your assets and liabilities. 

Your assets will include physical properties, such as stock, inventory, machinery, and land. These items usually have a quantifiable value. 

Furthermore, your assets also include intangible items, such as intellectual property and goodwill.

In addition, you will want to look at:

• the age of your business;
• the potential for growth of your business;
• your market capitalisation and your strategy to grow your capitalisation;
• the strength and dedication of your employees;
• the type of product you are selling, as a more innovative product could be worth more; and
• why you are valuing your company. If you are being forced into a sale, for example, you may value your business differently than if you are making a pitch to investors.

How Do You Value a Business?

Now that you have decided on the elements of your business valuation, the next point to consider is the valuation method that you will use. Again, there are a variety of valuation processes that you should be aware of.

Price to Earnings Ratio (P/E)

Working out a P/E (price to earnings) ratio is a good way of valuing a business if the business has an established financial history. 

A P/E ratio reflects a company’s post-tax profits divided by its valuation. In this way, your company’s valuation reflects its post-tax annual profits if you use a P/E ratio. If your profits are exceptionally healthy and you have a high forecast for profit growth in the future, then a P/E ratio may be preferable. 

Entry Cost

An entry cost valuation method looks at how much it would cost to set up comparable companies to your business. 

This means you will consider all of the costs in getting the business to its current stage and look at what a similar business would have to do to get to the same stage. This will include:

• developing a customer base;
• your tangible assets and intangible assets; and
• the team behind your company;

Discounted Cash Flow

This valuation method will predict the company’s cash flow over a certain period and base the company’s valuation on that equation. 

The equation will calculate the present value of predicted cash flows by using a discount rate. This accounts for risk and the time value of money. 

Key Takeaways

As a business owner, you are likely to have to value your business at some point. When you are valuing your business, you must account for tangible assets, intangible assets and your company’s team. 

There are different valuation methods once you have all the relevant data to carry out your business valuation. The method that is best suited for your business will depend on your company’s financial history. It will also depend on whether it has been operating for long enough to make an estimate based on post-tax annual profits or whether it is better to predict using estimated cash flows. 

If you need help with understanding how your company will be valued, our experienced corporate 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.

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