How much is my company worth? Inside our Indicative Valuation Report

It is often the first question an owner-manager asks us, and one of the most important. Knowing what your company is worth today shapes every decision about its future, from when to sell and what to expect, to how to bring in management or reorganise your shareholders. Our Indicative Valuation Report is designed to answer that question, and in this article we explain how we put one together.

Why an up-to-date view of value matters

Most owner-managers have a figure in mind for their business, but it is rarely based on how buyers and investors actually value companies today. An independent, up-to-date view of value helps you

• plan an exit with realistic expectations and a clear target to work towards
• respond with confidence if a buyer approaches you unexpectedly
• plan changes to your shareholdings, such as a Management Buy-Out, a shareholder exit or an Employee Ownership Trust
• put management incentives in place, such as an EMI scheme
• understand which areas of the business are adding to or holding back its value, as a baseline for Exit Readiness

How we put an Indicative Valuation Report together

Every report is tailored to the business, but each one follows the same structured approach.

1. Understanding the business. We start by meeting the shareholders to understand the history of the business, its ownership, its markets and what you want to achieve.
2. Information and scope. We agree the information we will rely on, typically the statutory accounts, management accounts and forecasts, and set out the scope and limitations of our work.
3. Financial performance. We review the trading history of the business, including revenue, gross margin and EBITDA, and the trends behind them.
4. Normalising earnings. We adjust EBITDA for one-off and non-recurring items, and for owners’ remuneration that is above or below a market rate, to arrive at the sustainable earnings a buyer would value.
5. Key value drivers. We identify what supports or holds back value, such as recurring revenue, customer concentration, margins against the industry average, growth and the strength of the management team.
6. Valuation methodology. We apply the methodology best suited to your business and industry, supported by research into comparable transactions in your sector and benchmarked against other techniques, as we explain below.
7. Enterprise value. We set out an indicative range for the enterprise value of the business.
8. Equity value bridge. We bridge from enterprise value to the equity value attributable to shareholders, using up-to-date balance sheets.
9. Conclusion. We summarise our findings, the limitations of the report and the practical next steps.

Choosing the right valuation methodology

There is no single way to value a company. The most appropriate methodology depends on what the business does, the industry it operates in, its stage of growth and how buyers in that market typically assess value. We therefore look at the business through several lenses and use them to benchmark one another, before settling on the approach that best reflects how a buyer would see it.

• Earnings multiples. The most common approach for established, profitable businesses, applying a multiple to normalised EBITDA, informed by comparable transactions and the valuations of similar listed companies.
• Revenue multiples. In some cases, such as high-growth businesses that are reinvesting heavily or not yet at their full level of profitability, a revenue multiple can offer a useful additional perspective on scale and potential.
• Recurring revenue multiples. For businesses with contracted, subscription or repeat income, such as software, managed services or professional services firms, recurring revenue multiples are a common reference point. They are more often used by acquirers as a benchmark alongside other methods than as a full valuation methodology, with the quality, retention and growth of that income all important.
• Discounted cash flow (DCF). We use DCF analysis to benchmark the market-based approaches, valuing the business on the cash flows it is forecast to generate, discounted back to today at a rate that reflects its risk. It is particularly useful for testing growth assumptions and the long-term potential of the business.
• Net asset value. Most relevant for asset-rich businesses, such as those holding property, and a useful floor for the value of others.
• Industry benchmarks. Some sectors use their own measures of value, such as a multiple of recurring fee income or a value per site, and we take these into account where they apply.

Bringing these methods together gives a more robust and defensible range of value than relying on any one of them alone, and helps explain why buyers in your sector may value the business in a particular way.

From enterprise value to equity value

Enterprise value is the value of the business itself, typically calculated on a cash-free, debt-free basis with a normal level of working capital. It is the figure most often quoted in the press, but it is not the amount shareholders receive. That is the equity value, and the steps between the two are known as the equity value bridge.

• Cash and cash-like items. Surplus cash left in the business at completion is added to the value.
• Debt and indebtedness. Bank loans, overdrafts, asset finance and shareholder loans are deducted.
• Debt-like items. Liabilities such as corporation tax owed, unpaid bonuses and deferred consideration from past acquisitions are usually deducted too. Other items, such as deferred income, are often a grey area, where the right treatment depends on the detail of each case. This is where an experienced advisor is important, negotiating what is market norm and fair for your business.
• Working capital adjustment. If working capital at completion is above or below the normal level agreed with the buyer, the price is adjusted up or down. Calculating that target level is one of the most important and most negotiated parts of any deal, and the analysis, knowledge and experience an advisor brings here can add real value to the outcome.

Understanding these items early is one of the most valuable parts of the report. It shows you what you could expect to receive, and where agreeing the right definitions with a buyer can make a real difference. The treatment of each item varies from deal to deal, and the descriptions above are general in nature and do not constitute advice.

Why timing within your financial year matters

The equity value bridge is calculated at a point in time, and a balance sheet is rarely the same from one month to the next. Cash and working capital move with the seasons of the business, tax liabilities build up through the year, and dividends, capital expenditure and loan repayments all change the picture.

As the example above shows, the same business with the same enterprise value could deliver a different equity value depending on when in the financial year a transaction completes. In a seasonal business, completing after the busy period, when customers have paid and cash is high, can produce a very different result from completing before it, when cash is tied up in stock.

Our Indicative Valuation Report can model the equity value bridge at different points in your financial year. Alongside your tax advisor, that helps you plan the timing of a transaction, dividends and other decisions, and choose the right completion mechanism, whether a locked box or completion accounts, as we explain in How do I sell my business?

What an Indicative Valuation Report is, and what it is not

An Indicative Valuation Report gives you an independent, evidence-based range of value, built on the information you provide and current market evidence. It is not a formal valuation for tax, legal or accounting purposes, and the price a buyer will ultimately pay is set through negotiation and due diligence. What it does give you is a robust starting point and a clear understanding of what drives the value of your business.

The benefits of regular valuations

A valuation is most useful when it is not a one-off. As your business continues to trade and grow, updating your Indicative Valuation Report regularly, typically each year or after a significant change, turns it into a practical tool for building value as part of our Exit Readiness process.

• Track the growth in value. See how the value of your business and your shareholding is changing over time, and how close you are to the value you would want to achieve on an exit.
• Measure what is working. Understand the impact of improvements to margins, recurring revenue, customer mix and the management team, and where to focus next.
• Keep pace with the market. Valuation multiples and buyer appetite change, and a regular review keeps your expectations in line with current market conditions.
• Be ready for opportunities. If a buyer or investor approaches you, you already have an up-to-date view of value and a clear position to negotiate from.
• Support shareholder decisions. Regular valuations give a consistent basis for discussions between shareholders, management incentives and longer-term planning.

Over time, this builds a clear record of how the business has grown and why, which is exactly the story a buyer will want to see when the time comes to sell.

You can see examples of the reports we have prepared, including Project Utah, Project Calgary and Project Boston, in our work.