Valuing a business accurately is critical for entrepreneurs and investors, especially when looking to sell, invest, seek investment, or plan for growth. This business valuation guide will help you understand the essentials and the valuation process as a whole.
At Alderway, we support businesses in often undervalued and overlooked Backbone Sectors. Accurate business valuation aligns with our Partnership Capital approach, helping businesses unlock value and achieve remarkable returns.
What is Business Valuation?
Business Valuation refers to determining a company's economic value. It's essential for business owners, investors / potential buyers, and financial professionals to assess a business's worth and a fair market value for various purposes.
Why Valuation Matters
Accurate business valuation is crucial for decision-making, including selling or buying a business, raising capital, strategic planning, mergers and acquisitions, and understanding a company’s financial health.
The importance of business valuation is particularly relevant for SMEs in Backbone Sectors, which may be overlooked but possess large customer bases with significant growth and investment potential.
The Importance of Accurate Business Valuation
Accurate valuation supports informed decision-making, helping entrepreneurs and investors determine fair pricing, evaluate potential investments, and negotiate better deals for long term future growth.
Valuation is also vital for planning growth, securing funding, and attracting investors. It helps businesses demonstrate their worth and potential to stakeholders.
Understanding the true value of a business also allows for better risk management, ensuring that owners and investors are aware of the business's strengths and weaknesses.
Common Business Valuation Methods
There are a number of different valuation approaches. Understanding industry best practices will be important when obtaining a company valuation. Different industries have specific valuation techniques most relevant to their market dynamics, so it’s important for you to understand what method will work best for your business.
Here are some examples of popular valuation methods:
EBITDA Multiple Valuation
The EBITDA multiple is a valuation method used to assess the value of a business by comparing its Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA).
This ratio helps to normalise differences in capital structure, taxation, and fixed assets across companies, providing a clearer comparison. It's widely used in financial analysis, particularly for evaluating the potential for mergers and acquisitions, and to gauge whether a company is overvalued or undervalued relative to its peers. This is the method Alderway uses.
Entry Valuation
Entry valuation determines the business's value at the point of acquisition or investment. This method focuses on initial cost and projected returns / future profits, making it particularly relevant for other private equity firms.
Discounted Cash Flow (DCF)
The Discounted Cash Flow method values a business based on its future cash flow projections, discounted to present value. This method will incorporate a cash flow analysis and is ideal for businesses with predictable and stable cash flows.
Asset Valuation
The Asset Valuation method calculates a business's value based on its tangible and intangible assets. It's often used for companies with significant physical assets.
Times Revenue Method
This method values a business by applying a multiple to its revenue. It's common in industries where revenue is a key indicator of value, such as technology or software companies.
Price to Earnings (P/E) Ratio
The P/E Ratio method values a business based on its earnings, using a ratio that compares the company’s stock price to its earnings per share. This method is widely used for publicly traded companies.
Comparable Analysis
Comparable Analysis values a business by comparing it to similar companies that have been sold recently. It's particularly useful in industries with clear market leaders and benchmarks.
Precedent Transaction Method
The Precedent Transaction Method analyses the prices paid for similar businesses in past transactions. This method helps establish a valuation based on real-world data and market trends.
When and Why to Seek Specialist Advice for Business Valuation
Business valuation is complex and influenced by factors such as market conditions, industry trends, and unique business characteristics. It will take into account intellectual property, tangible assets (and sometimes intangible assets) and financial statements.
Seeking specialist advice is important, especially for SMEs in Backbone Sectors because professional valuers and business brokers bring expertise, objectivity, and an understanding of industry-specific factors.
Alderway’s Partnership Capital approach supports businesses in conducting thorough and accurate valuations, helping them unlock value and achieve growth.
Why You Should Value Your Business
There are a number of reasons you might be looking to value your business including:
Selling your business
Business valuation is one of the first and most important factors in the selling process. Getting a correct value for your business before you sell will be key for a sale price that is fair and that you're happy with. Alongside helping your buyers assess their investment, it will ensure you receive a fair price.
Raising Capital
Much like selling, valuation is also key when you’re raising capital. As investors, we would need to understand the business's worth and your financial performance with a cash flow analysis to determine the appropriate investment level and terms. Ensuring your have a clear value will help in both seeking the right investor and making sure you reach a fair deal for all parties as quickly as possible.
Strategic Planning and Growth
You don’t need to wait until you’re thinking of selling or getting investment to seek valuation for your business. Ongoing business valuation is important for strategic planning and growth now. Obtaining a fair market value will provide insights into where value can be added or optimised within your business plan so that even if you’re only beginning to think about selling or raising capital, you have all the information you need to prepare and increase the value of your business when the time comes.
Mergers and Acquisitions
Another time it will be vital to get a valuation is when it comes to mergers and acquisitions. Accurately assessing both companies involved will be important when negotiating terms and ensuring a successful integration.
Overall, understanding and accurately determining business value is essential for entrepreneurs and investors. Key valuation methods and the importance of seeking professional advice are recommended for unlocking potential and achieving remarkable returns.