You’ve spent years growing your business. Blood, sweat and tears have gone into building up an
asset that will allow you to live your dream once you’ve sold the business.

So, what is the value of your company?

That might be a simple question, but it’s not so simple to answer.

The problem is there are a few ways to value a company. The method that is right for you is largely
dependent on the type of company it is.

I have spent my career valuing small and medium sized businesses and helping the business owners
prepare their companies for sale.

Broadly speaking there are three methods for valuing a company.

1. A company that sells products or services

A profit multiple of the ‘average annual maintainable earnings’ for the last three years is used for a
company that sells products or services,

This figure for earnings is taken from the accounts with adjustments made for:
• Possible understatement director’s remuneration that is taken as a dividend.
• Non-recurring or exceptional items.
• Possible cost savings in synergies created by the combination of the buyer’s and seller’s
companies.

The profit multiple is usually between 3 and 7, however this will depend on:
• The competence of management
• Efficiency of trading operations and
• Marketability of the product or service.

2. A Property Investment Company

Greater reliance is placed on the asset values instead of income streams (e.g. rent receivable,
dividend and interest receivable) when it comes to valuing property investment or investment
companies.

The assets are revalued, from which the company liabilities are deducted.
Also deducted is the potential tax liability on the surplus on the asset revaluation. This revised net
asset value forms the basis of the sale price to be negotiated.

3. A Professional Services Company

The valuation for professional or service companies that have a strong link to their clients is based
on a factor of annual recurring fees. That factor is normally between 0.7 and 1.5.

The agreed valuation is normally paid over 3 years in two parts as:
• A non-returnable deposit on signing the sale contract and
• With the balance payable in proportion to the fees of the clients that remain with the seller
firm in years 2 and 3.

When is a good time to sell your business?

Alongside the above formulae, market conditions will have an effect on the sale price of your
company. At the time of writing, at the beginning of 2021, the current conditions will tend to
depress the sale price.

You may decide it’s time to cut your losses by selling now in a depressed market and start again
when the time is right.
Or, if you decide to continue trading, you can put in place the measures to prepare your company
for sale, so that you will be ready to press the sale button, when the time is right.

Note:

This article is for guidance only, covering the bare essentials on company valuations. When you plan
to sell your company, it would be prudent to engage an expert in company valuations to ensure you
gain the best price.

If you need any further information or explanations, you are welcome to contact David Cane. David Cane of Sundial Tax & Finance Ltd.