How to value a company in the UK
Valuing a business isn’t as simple as looking at the retained earnings or total net assets – it is a subjective exercise that requires professional judgement!
You might need to know how to value a company UK for many reasons:
- Assessing the value of a long-term incentive plan (LTIP). Learn more about what is LTIP used for in our focused article.
- Deciding to allocate gifts of shares of private limited company shareholding
- Placing the business up for sale, negotiating a potential buy-out project or securing fresh investment
Arriving at an accurate company valuation can be high stakes. You don’t want to undervalue the business and sell it short, nor do you wish to overstate the value.
Alternative ways to value a UK business
Unfortunately, there isn’t one universal way to value a company.
The best option will depend on lots of factors, including why you need a valuation.
Price to earnings ratio
One of the basic ways to reach a value is to look at your profits. A price to earnings ratio does just that by multiplying your profits after tax to arrive at a simple value figure.For example, if you use a ratio of four and make £500,000 post-tax, the business is worth £2 million.
However, this can be a bit complicated, as there isn’t a fixed ratio to apply.
High-growth businesses in sectors such as tech use a higher ratio, whereas a conventional firm like an estate agent would use a lower basis.
Contact the Harper James solicitors team for advice about the suitable price to earnings ratios for your business.
Basing a business valuation on industry sales
The next option is to look at standardised industry rules of thumb – again, it’s a matter of opinion, so it’s well worth having legal advice before you start making decisions on this basis.
Retail is perhaps the most straightforward example.
Suppose a similar business with a comparable turnover, customer base, and number of outlets has been valued, and your profit rates are equal. In that case, you could opt for a rule of thumb valuation.
We would note that this is better used as a guide for internal decisions rather than a verified figure for a business sale or investment pitch.
Entry cost company calculations
Your third option is to work out an entry cost, i.e. how much it would take another start-up to reach your current trading levels.
That calculation should include everything you have invested in your business to reach your current position, including:
- Start-up costs
- Assets
- Product development
- Marketing
- Staff training
Your entry cost is another ballpark figure, but it isn’t always a simple task since you may have contributed a substantial amount of time that’s tough to quantify.
Choosing the right way to value your business
An aspect we haven’t yet covered is goodwill. This element is perhaps the most subjective.
Goodwill means the assets your business holds that you can’t easily measure:
- Reputation
- Brand awareness
- Intellectual property rights
- Commercial expertise
A broker will rarely value two businesses with identical profit the same since an appraisal will consider the power of the brand and how that affects the amount a buyer would pay for the company.
While you can’t buy or sell goodwill, it’s a crucial part of your business since this proportion of the company value could be considerable.
If you need a quick method to estimate a business price, the above methods can provide a simple solution. If you’re still unsure, it’s best to check out legal help for startup businesses or well-established companies.
Should you be looking at any form of a company sale or new investment, it’s essential to consult an experienced valuation professional to ensure you arrive at a figure that represents the true worth of your business – including those assets that you can’t put a price on.
