It is important to understand the purpose of the valuation before you begin, as this will determine which approach is best to take. Aside from selling, typical reasons to value a business include attracting investors, negotiating a merger or acquisition deal, or planning for growth. 

Once the purpose is known, a Corporate Finance adviser can assist in identifying the best valuation approach from the options available.

Regardless of the reason however, several factors will come into play when calculating the expected financial value of a business.  These include:

1. Collating financial information

Comprehensive accounting records are the foundation of any business valuation, as they paint a clear picture of its financial health.

The following documents should be compiled in order to begin the process:

• Profit and loss statements: showing revenue, expenses, and net profit.
• Balance sheets: detailing assets, liabilities, and equity.
• Cashflow statements: reflecting cash inflows and outflows.
• Tax returns: typically for the last three years.
• Detailed accounts of receivables and payables: listing outstanding debts and credits.
• Insights: details of any other factors which may affect the value of the business, for example significant customer or supplier concentration.

2. Choosing the right valuation method

There are several methods that can be used to value a business. As each method has its own advantages and limitations, our team at Rickard Luckin will assess the right one to use for each individual transaction. 

The most common valuation methods include:

Market value

The market value method compares the business to similar ones that have recently been sold, by applying a comparable multiple to its earnings (usually EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortisation) to estimate overall value. This method is most effective in industries that have a number of comparable sales.

Asset-based valuation

This method calculates the net asset value of the business by subtracting liabilities from the total asset value.

There are two main approaches: book value, which is based on the business balance sheet, and liquidation value, which estimates the net cash resulting from a quick sale of assets.  As such, this method is particularly suited to asset-heavy businesses, such as property companies.

Discounted cashflow (DCF)

DCF is a complex method that estimates the present value of future cashflows. This involves projecting future cashflow based on historic business performance and future expectations, and determining a discount rate that reflects the risk and time value of money.

3. Considering intangible assets

Intangible assets, such as brand reputation, customer relationships, intellectual property and proprietary technology, can significantly impact the value of your business.  A good corporate finance advisor will evaluate and incorporate these assets into your business valuation.

4. Adjusting for market conditions

Variable issues like industry trends (such as recent growth or decline in your sector), the positioning of your business relative to its competitors, and the wider economic climate will all influence your valuation.  At Rickard Luckin, our expertise includes adjusting business valuations to reflect external factors such as these.

To summarise, valuing a business in financial terms involves a wealth of considerations and can be both complicated and nuanced. If you need support, our specialist team at Rickard Luckin will provide an objective and detailed valuation that brings experience, industry knowledge, and access to a wide range of data