How to value a business in the UK: All you need to know

How to value a business in the UK: All you need to know
Dakota Murphey
Dakota MurpheyDakota Murphey

Posted: Thu 9th May 2024

Valuing a business is vital for a wide range of UK companies sector-wide. Whether you’re running a start-up or representing a well-established national enterprise, business valuations can prove valuable if you’re looking to make important decisions regarding its future.

Business valuations in the UK may be needed if you’re, for example, trying to sell your business, looking to raise funding or investment capital, or engaging in a merger or acquisition. Getting an accurate valuation is pivotal in helping business owners in the UK obtain a fair price estimate and allow informed negotiations to take place.

This short guide will outline everything that UK business owners need to know about business valuations, including why they’re important and how they can calculate them.

What is a business valuation?

A business valuation is a professional analysis that seeks to establish the monetary value of a company. It is a complex assessment that looks at a wide variety of quantitative and qualitative factors to objectively determine a company's worth.

A typical valuation will take numerous business characteristics like cash flow, asset inventory and profit margins, among others to arrive at a comprehensive, informed number. Calculating a business’s valuation will normally involve a combination of these strategies, often requiring the involvement of a professional third-party financial services provider.

It doesn’t matter whether the business operates in the e-commerce and retail space, consultancy, agriculture, construction industries or any other sector, a specialist tax accountant can help you calculate the value of your firm and offer practical advice about where you take it next.

Below are just some key reasons you may need a valuation:

  • Selling a business: Ensures you set an asking price in line with market value

  • Seeking investment capital: Helps determine the percentage of equity to offer investors

  • During acquisitions or takeovers: Prevents overpaying for a target company

  • Shareholder disputes: Creates an impartial value for share allotments

  • Reporting requirements: Certain accounting and tax standards mandate valuations

Many ambitious business owners are encouraged to apply for government-backed grants and loans to help get their firms going, particularly in a turbulent economy. Down the line, after a few years of steady performance, some entrepreneurs may simply want to get an idea of how much their business is worth, even if they have no imminent plans to sell, merge, or seek additional investment. An accurate valuation provides a transparent, pragmatic view of a firm’s market worth and serves as a guideline for its long-term financial stability.

What factors determine a company’s value?

There are many variables assessed during a business valuation. The most common include:

Company financials

  • Historical revenues, profits and monies owed

  • Projected future earnings and cash flow

  • Profit margins and other key ratios

Assets and liabilities

  • Accounts receivable and payable

  • Inventory, property, equipment and machinery

  • Loans and collateral

  • Intellectual property, brands, patents

Company size and growth projections

  • Sales and customer base

  • Market share and growth potential

Macroeconomic conditions

  • Analysis of markets, sectors and competition

  • Regulatory issues, technological changes

Calculating how much your business is worth

With geopolitical tensions and supply chain disruptions causing market turbulence, it’s reassuring to know that SMEs in the UK economy are still statistically thriving. As SME owners navigate rocky waters over the coming months and years as the economy stabilises, a valuation can be helpful if they are to take that pivotal next step.

There are several ways to assess your business value, each with unique benefits and drawbacks. Many professional valuations will combine some of these methods to arrive at a more informed figure, so it’s worth looking at multiple options.

Some of the most common methods include:

1. Entry valuation framework

This involves calculating the cost of creating a similar enterprise from scratch in the current market conditions. It involves itemising all the potential costs associated with this hypothetical start-up, including acquiring assets, hiring employees, establishing a customer base, products, services and more.

These are aggregated as expenses, from which cutbacks can be identified and efficiency savings can be made.

While this approach can be helpful for new or niche start-ups, it doesn’t offer deep insights into the future value of a business.

2. Asset valuation

Firms with extensive assets can benefit by having an asset valuation conducted, helping them understand the value of tangible (physical) or intangible (non-physical) assets owned by the business.

Understanding the value of tangible assets like inventory, equipment and office space, as well as intangible assets like branding, intellectual property and patents, can be immensely valuable.

The Net Book Value (NBV) can be calculated by deducting the costs of liabilities (like debts and outstanding lines of credit) from the total value of these assets. Inflation, depreciation and appreciation should all be factored in.

Obtaining a valuation using this method may provide greater oversight into the net value of all assets but it doesn’t mean that it reflects a company’s market value (i.e. how much a prospective new owner is willing to pay for it.)

3. Price-to-earnings (P/E) ratio

This method evaluates a company’s stock price compared to the potential profit that an investor can make from it. A share price average and the previous 12 months’ earnings are all used in calculating the P/E ratio, which can then be compared to other businesses in your sector to determine if it’s performing below, at or above average levels.

A high P/E may suggest a comparably high stock price in comparison to its earnings, while a low P/E implies that the business is undervalued.

This method is commonly used by larger, publicly traded companies, while smaller private and limited firms may not benefit as much by having this calculation.

4. Discounted cash flow (DCF)

The DCF method is a sophisticated approach that determines the present value of future cash flows. In other words, a DCF valuation will calculate what a future cash flow stream would be worth, at which point a company’s valuation can be calculated.

Businesses with stable and predictable cash flows can benefit by understanding the present value of future cash flows, particularly if they are aware of any notable risk factors and potential returns.

This valuation method is commonly requested by future angel investors or venture capitalists (VCs) as they want an accurate picture of their possible investment return within a specific timeframe.

5. Comparable analysis

This method involves estimating a business in comparison to similar firms in its industry. Creating a comparable analysis involves utilising some valuation methods like P/E ratios, to help benchmark the value of a comparable company. From this, you can determine your business’s relative valuation.

It’s important to remember that public firms often have higher valuations than private companies due to their liquidity and market presence. Therefore, when using this method, it’s crucial to apply a relative discount of between 30 and 50%.

Final thoughts

It’s clear how beneficial valuation reports can be, but equally, it’s important to be methodical when pursuing such a report. Ensure you understand the key requirements and expectations when requesting a valuation, and consult third-party help for expert, impartial advice.

Be sure to ask questions throughout the process and clarify any figures that seem unclear or unreasonable based on your intimate knowledge about your business and industry. Ultimately, the valuation is there to help you take it to the next level, whatever that may entail.

Relevant resources

Dakota Murphey
Dakota MurpheyDakota Murphey

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