A client recently asked us to value his company, which is something every business or company owner thinks about – what is my business or company worth?
Valuing a company or business is not an exact science and a lot depends on opinions and expertise, and the sad answer often is – what someone is prepared to pay for it!
Notwithstanding this, it is still vital to understand and know what the value of any business or company really is in fiscal terms and why we are valuing the business.
Why Would You Request A Valuation?
There are many reasons why a client wants to value his business or company:
- Buying or selling a business
- Preparing the business for sale
- Raising finance or equity
- Retirement or exit planning
- Tax planning
- Keyman insurance
- Shareholder protection
- Inheritance planning and inheritance tax planning
- To buy out partners or minority shareholders
- Motivating management or key employees for greater success and growth
- Creating share options for valuable employees
- Preparing a finance restructuring plan
- To assist with bank negotiations
- Creating a Business Plan
- Mere curiosity!!!
This all sounds very good, but it is not a simple as it first appears.
The client was under the impression we would just look at his accounts and that would be all we needed. Unfortunately, that is very rarely the case. We need to know much more detail.
Factors To Be Considered
These are our initial questions – more may follow depending on the answers provided and once we start preparing the report and calculations.
· We need minimum of 3 years full accounts, but 5 is better.
· Is there company “profile” literature, with Visions and Mission statements ( helps us understand the company and its workings)?
· Exactly what does the company do? Please explain in detail
· Does the company work:
- locally,
- nationally and
- internationally?
· What methods does the company use to market its services?
· Are there established marketing practices
- explain in detail?
· Does the business lend itself to repeat business?
- If yes, what % of turnover comes from this?
· Are there any long term renewal able contracts and what value % of the turnover do these represent?
· Does the company hold any patents or copyrights?
- If yes, full details?
· Details and experience of senior employees and to what extent could they replace the management of the company?
· How experienced are the Director(s)?
- Please provide short CV’s
· Are there established Operations Managers within the company?
· Are there established sales/ marketing Managers within the company?
- Briefly Highlight their roles and major successes
· Does the company have an established trading name:
- locally,
- nationally and
- internationally?
· Location of all its offices and does any marketing / sales or contracts depend on their locations?
· How much of the work practices, company managements etc is in the Director(s) head(s)
· How involved in the management of the company are the Director(s)?
· How involved in the “actual work” processes are the Director(s)
· Does the substance of the product or service effect the value, i.e. what is the company’s USP?
- How unique is the company’s service or product?
- Detail the competitors, how they differ and what makes your company better than the competition
- Any unique or outstanding attributes of the company?
· What are the Director(s) overall views of the company’s future?
It is here where further questions may arise, for example explanation of exceptional items of other operating income or profit/losses on sales of assets, that would affect the pre-tax profits.
Fortunately, our client could answer most of these questions without too much effort, thus providing us with a good base on which to start building the valuation.
After analysing 5 years of accounts, adding-back those items which are excluded from the valuation and taking an informed view of where the client is taking the company, we could produce the valuation and accompanying reports.
In this case – to our client’s surprise – we could place a value considerably higher than he was anticipating, thus allowing him to decide in what direction he would to take the company in the future.
However, this is of course frequently not always the case and more often than not clients have an inflated view of their company’s worth – after all, it is their baby”!
So again, you have to consider the fact that it is only worth what someone is prepared to pay for it!
If you’re in a position where a business valuation would help you, why not call Avanti (08000) 388 799 to see how we can help you.