How do you value a business?
Gareth Price, Deputy Portfolio Manager at Finance Wales, shares
his views on how to value a business.
When you are thinking of selling or buying a business whilst you
may well have a number in mind you will be also asking yourself how
much the business is actually worth.
“What somebody is prepared to pay for it” would be the flippant
answer, but how does the buyer decide how much to offer?
There are many techniques used for valuing businesses, ranging
from simple multiples to complex discounted cash flow calculations,
but all ultimately have the same aim - to put a value on the future
cash flows that a business is expected to produce.
If you knew how much cash would be produced, valuation would be
relatively easy. You would also need to know precisely when
the cash will be produced - a pound today is worth more than a
pound in the future due to inflation and uncertainty, so cash flows
become increasingly less valuable the further in the future they
are. In the real world, however, the “how much” and “when”
are a not straightforward to work out and valuation becomes less of
Once you have arrived at a number, though, what does this value
actually represent? The point here is to consider what
someone is buying. For example, are they buying the assets of
the business, or shares in a company? Are they buying the
whole business, or just a part? Are they inheriting the cash or
debt in the business or is it being sold on a cash- and debt-free
basis? What is the normal working capital (i.e. stock,
debtors, creditors) that the business requires in order to operate
properly, and how is this to be funded? Are there any land
and buildings, or valuable intellectual property, which will be
included in the sale? Are there any tax implications?
So, with all of these things to take into consideration, where
to start? Taking professional advice from an accountancy or
corporate finance firm is one option, as they would be able to
guide you through the process.
For a quick estimate, though, the simplest company valuations
involve a multiple being applied to a company statistic, such as
the company’s profits, or its sales, or sometimes an
industry-specific measure such as room occupancy for a hotel.
Working out the correct multiple to use is then the next trick –
the usual way of doing this is to look at prices paid for similar
businesses in the past or to look at the valuations of similar
businesses quoted on the stock market. These can vary widely
by sector, from low single digits for mature, low-growth businesses
to multiples of 20 times, 30 times or higher for high growth
technology stocks, and can also vary widely with company size -
picking the right companies for comparison is very
These multiples are often applied to actual historic results
for, say, the last financial year, but equally may be applied to
forecast figures. So if you are thinking of selling your
business both good historic information (audited accounts or
comprehensive management accounts) and reliable forecasts are
The important thing to remember, though, is that ultimately
there is no such thing as a “correct” value for a business, only a
range of values that is acceptable to both buyer and seller.
You can call us on 0800 587 4140 or email us at
to get more information and talk to a dedicated investment
executive, who will help you through the process of getting