If you are looking to sell your business, the first thing you must do is value the business.
Business valuation involves gathering relevant information, properly normalising financial statements, identifying intangible assets, analysing business value drivers and risks, developing credible financial projections and then applying an acceptable valuation method.
The three main valuation methods are as follows:
1. Discounted Cash Flow Analysis
This method requires the use of Excel to create a financial model and using this model to carry out an extensive amount of detailed analysis which will allow for the forecasting of the entity’s unlevered free cash flow in the future and discounting it back to today.
This is the most accurate method of analysis but also requires the most amount of work.
2. Comparable Company Analysis
This method involves looking at the value of other similar sized businesses and using comparative figures such as P/E ratio or EV/EBITDA ratio. For example; the value of a share in a certain industry may be calculated using a P/E ratio of 10, in which case if a share has a return of £5, the cost per share in the company would be £50.
This is the most commonly used method of valuation as the data used is current and the calculation involved is relatively simple.
3. Precedent Transactions Analysis
This method compares the company in question to another entity that has recently been sold in the same industry. It uses the price paid for a similar entity in the past as an indication of the price which should be paid for the entity in question.
It is important to note that business valuation must be done in a thorough and objective manner as undervaluing or overvaluing can lead to decisions which have an adverse effect on the entity.
