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BKL news - Corporate finance 
What's it really worth?
by Daniel Shear
We all want to know what our assets are worth. This could be to aid a potential sale, for tax planning purposes, or even for the “feel good” factor. Valuing a house isn’t so difficult after a visit to the local estate agent to ascertain the prices of comparable properties. But how are businesses valued? And why? And what different valuations are there?
Valuation Techniques
There are a number of different techniques used to value businesses. The main ones however, at least for owner-managed businesses in the “SME” sector, include:
- Discounted cashflow
- Capitalisation of profits
- Relative valuation
- Asset based valuation
- Capitalisation of dividends
There is no magic formula used to value a business, and valuations necessarily rely upon the professional expertise and judgement of the valuer. The choice of method and all associated inputs is down to the valuation expert. Therefore two experienced and professional advisers could (and would likely) deduce two different valuations for a business, though hopefully these values would not be orders of magnitude different.
Reasons for a valuation
Simply put, valuations of businesses could be undertaken for commercial or fiscal reasons. A fiscal valuation is a determination of the value of a business at a point of time so that any resultant taxation can be agreed with the tax authorities.
Commercial valuations could be undertaken for a number of reasons including:
• Valuing the stake in a business for a shareholder joining or leaving the business
• Aiding potential vendors of businesses to understand likely sales proceeds
• Assisting acquirers of businesses in structuring an appropriate package with which to buy a business
• Assisting Courts in appropriating assets in the event of divorce
It is crucial to remember that the price of any asset is determined by the marketplace. Therefore any valuation placed upon a business may not necessarily correspond to the actual price for which that business would change hands on a sale. This could be because the buying party is willing to pay a premium perhaps to secure a particular customer, or the seller may be willing to sell at a discount to facilitate a quicker transaction.
Even when a valuation is contemplated the parties must first agree to the type of valuation required. Commercial valuations are normally classified as being owner values, market values or fair values. The difference between the various types could fill an entire book but put simply owner value corresponds to deprival value (what the owner would require to be deprived of the asset), market value corresponds to what the asset might fetch in an open market between a willing buyer and seller transacting at arm’s length, whereas fair value corresponds to what is fair between the two parties transacting. To illustrate the difference, a 15% shareholding in a company will almost certainly not correspond to 15% of the total value of the company, but the difference would depend on the composition of the remaining shareholders and the identity of any buying party.
This all means that for a valuation to make sense the valuer must be provided with all relevant information on the business, and the precise reason a valuation is required so that the parties to the valuation can agree on the most appropriate valuation type for their purpose.
This may all sound daunting. That’s why we’re here to help. BKL Corporate Finance has plenty of experience in valuing businesses for a variety of reasons. We’ll advise you on the most appropriate valuation for your needs and undertake the valuation in an efficient manner.
For more information about how we can help you, please contact Daniel Shear
