Most commonly, SMEs are valued using a multiple of profits (usually EBITDA) to reach the enterprise value. This is then adjusted for any surplus cash and reduced by any debt, such as HP, bank overdrafts and corporation tax to ascertain the equity value.
The multiple reflects the risk of the investment by estimating the number of years it will take for the business to generate enough profits to repay the original consideration. The number used is based on number of things, such as the current industry standard and the trading history of the business. For example, if the historic accounts demonstrate consistent profitability and support the projected growth trajectory, this should lead to a higher multiple. Similarly, if the success of the business is largely dependent upon the exiting shareholder, this is likely to have the opposite effect.
If loss making, the value may be determined by the net asset position as, in theory, this is what could be achieved if the business were to be wound up and the assets sold, debtors collected etc. This should then be reduced by the estimated cost of winding up, such as redundancy and property dilapidations.
There are various ways of calculating the theoretical value of a business. Whether this can be realised on a sale depends on whether you can find the right buyer.
It is important to engage a corporate finance advisor who understands the various factors that influence valuation and will not only negotiate the best deal on your behalf, but will also ensure it is structured in the most tax efficient way.
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.
Disclaimer
The information was correct at time of publishing but may now be out of date.
