A business valuation estimates what an enterprise or its shares are worth at a specified date and for a defined purpose. The result depends on the information available, the assumptions used and the rights attached to the shares. A valuation for a sale, investment round, shareholder dispute, tax exercise or internal planning may therefore produce different conclusions. This article is part of the reference collection published by Harper James.
The income approach values expected future cash flows, usually through a discounted cash flow model. It is useful where management can support reliable forecasts, but small changes to growth, margins or the discount rate can materially alter the result. The market approach applies a multiple drawn from comparable listed companies or completed transactions. Common measures include enterprise value to EBITDA and enterprise value to revenue, although the comparison must reflect differences in size, growth, sector, debt and customer concentration. The asset approach values the company’s assets and liabilities, making it more relevant to asset-rich businesses or companies whose earnings do not reflect underlying value. Explore further valuation resources.
Start by defining the purpose, valuation date, ownership interest and basis of value. Gather management accounts, audited statements, budgets, customer and supplier contracts, debt schedules, tax records, intellectual property details and information about employees and contingent liabilities. Normalise earnings by separating recurring trading performance from exceptional costs, owner-related expenses and one-off income. Then select appropriate methods, test optimistic and conservative scenarios, and reconcile the outputs rather than relying mechanically on a single figure. Check whether the company has surplus cash, debt, working-capital requirements or minority shareholdings that affect the equity value.
Value is only one part of the deal. The price may be adjusted through completion accounts, a locked-box mechanism, earn-out terms, deferred consideration or an agreement about assumed debt and working capital. Buyers also test the assumptions through due diligence, while sellers need accurate financial information and clear explanations for unusual items. A board should record the valuation method, key assumptions, sensitivity analysis and any conflict of interest. The final figure is best treated as a reasoned range, with the negotiated price reflecting risk allocation, financing, timing and the parties’ wider objectives.