6th October 2017
The suggestions that follow concern the value of a business not the value of the shares in the limited company that owns the business. The value of each of the shares can differ depending for example on whether they are a majority or minority, whether they carry the right to a dividend and many other items. A company may have items that are not part to be included in the sale such as the property from which it carries on its business which is frequently transferred to the business owner before sale.
The earnings on which valuations can be based are usually Revenue, Gross Margin, Earnings before interest, tax, depreciation and amortisation (EBITDA) or Earnings before interest and tax (EBIT).
So typically a multiple of revenue is used for businesses that can be stripped of their overhead ie salaries and property, such as insurance brokers or even some IT businesses.
For most of our members a multiple of maintainable EBIT will be used. Steve Knowles said between the normal multiple for their clients is between 3 and 5; I would have said between 6 and 10 but Steve has the up to date hands-on experience. And for Software companies the multiplier is much higher.
Asset values are usually used for property companies.
Increasing Your Value
Steve had the following thoughts: profits on a rising trend, a well balanced management team that does not need the owner; good long term customer relations, good quality customers, innovations/new products; case studies, recurring income, positive cash flow, good staff relations.
Decreasing Your Value
The reverse of the above plus- a concentration of customers, under performing family members, adverse publicity/reputation.