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Business valuations – how are they determined?

“Business valuation is an art not a science” and “a business is only worth what someone is prepared to pay for it”; these are both absolutely true statements, but how then do you get at least an indication of what a business is worth?

Whilst there are many different methods used for business valuations, for sme businesses here in the UK, the majority of valuations are founded on a multiple of what cash profits can be produced by the business, on a realistic, sustainable basis, over, say, the next 3 years. The traditional manner of determining what these cash profits are is to calculate Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation).

Why not use real cash profits? Mainly because these are very difficult to calculate and most sme businesses don’t produce this information, nor do they have the ability to produce it from their internal management information systems.

There are many other factors that impact on the valuation of a business, such as the location of the business, customer concentration, the availability of buyers with both the capability and appetite to acquire dependency on the departing owner etc. but as a starting point the Adjusted EBITDA and the multiple are the key factors used.

When it comes to determining the correct multiple of the Adjusted EBITDA to use, there are various sources of information and it is true to say that none of them is entirely reliable. Many private business sale transactions are confidential so they never come to light outside the principals and their advisers. Most are never reported publicly but some leading business brokers (including Anderson Shaw) provide input about transactions, on an entirely anonymous and confidential basis, to organisations that compile the data.

One such organisation is Business Valuation Resources (“BVR”).  Whilst based in the US, BVR captures data on a worldwide basis and produces regular reports around deals that have been reported to them. For example, they report by sector, all deals reported to them each quarter; a graph from their report for Q4 2018, by sector is shown below:

Source is bvresources.com

Business Valuation Resources is the copyright holder and the copyrighted material was reproduced with BVR’s written permission.

The mean for this particular quarter was a multiple of x 4.2 EBITDA.

The figures will obviously vary over time, but they do tend to show a reasonably consistent picture and at Anderson Shaw we use this information as part of our research when providing business valuations to our Clients.

If you are interested in discussing a business valuation, or if you are ready to talk about selling a business, then please Contact Us or call us for a no obligation, confidential conversation on 02476 100476

 


Anderson Shaw has offices on the outskirts of Coventry and provides business broker and corporate finance services for clients throughout the Midlands and the UK.

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