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How to value a company
10/01/2023
Methods
There are 3 principal methods of company valuation.
Asset based approach
This method looks at the market value of the assets held by the company. Even taking into account the leased assets, this is not going to give a strong valuation.
Market value approach
This approach looks at similar businesses and compares market value. If you are aware of any such businesses, it may be worth considering them, although there are likely to be differences in structure and asset-base.
Earnings based
For a small company, this would be the most popular approach. It looks at an adjusted EBITDA ( earnings before interest, tax and depreciation ) and applies an industry multiplier.
Can use a weighted average on the EBITDA to give more weighting to recent years - relevant for a growing company.
It can be adjusted for costs that are one-offs, or where the accounting treatment may differ.
You can create figures both with and without a market salary for directors. i.e. you can add back owner drawings – salary, pension, dividends etc. and then deduct the cost of a commercial manager.
There are now 3 full years of reporting as a company, which gives a better basis for earnings-based valuation.
Add back the lease payments, as these are capital in nature, even though the payments are currently going through the P&L. There would be an argument to capitalise the company’s ‘right to use’ the assets.
For a small private non-traded company, the multiplier would normally be between 3 and 5, giving a range of valuation which would seem reasonable given:
Reports
https://www.wealthandpolicy.com/wp/BP141_Valuation_Shares.pdf
EBITDA multiples
https://www.icaew.com/library/company-research/private-company-multiples
https://www.equidam.com/ebitda-multiples-trbc-industries/
HMRC links
https://www.gov.uk/guidance/shares-and-assets-valuations-for-tax
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