The Basis of a Valuation

Our team can help you understand the key criteria your shares will be valued upon.

There are essentially three main aspects to valuing a company: assets, earnings and cash flow.

It is usually the valuer who decides which of these options is the most appropriate for valuations. Certain companies (e.g. property investment companies) favour a net asset-based valuation but others (e.g. an online retailer with little or no assets) will favour an earning based valuation.

Valuing Assets

An asset-based valuation focuses on the value of the assets owned by the company (e.g. property, plant and machinery). Whatever the nature of the assets, it may be necessary to choose a specialist valuer (e.g. a surveyor or estate agent for valuing real estate) to identify their value.

Valuing Earnings

The most common form of valuation is based on earnings (or earnings capacity). This concentrates on the income and earnings generated by your company both historically and its potential in the future.

Here, the valuer determines the likely ‘maintainable earnings’ of a business by making adjustments to historic profits and directors’ remuneration in order to strip out costs that a buyer could alter. ‘One off’ costs (exceptional items) are also usually stripped out.

The valuer then applies a ‘multiplier’ (often called the Price Earnings Multiple or Price Earnings Ratio) to these maintainable earnings, which reflects an estimate of how likely the business is to continue generating these earnings.

The resulting valuation may be cross checked or adjusted against the value of the company’s assets (e.g. land) or other value not reflected in the earnings-based valuation (e.g. cash in the bank).

Valuing Cash Flow

In certain scenarios, valuations are done by discounting cash flows going forward. This values a company on the basis of the cash or revenue its business generates. Alternatively, valuers may estimate a future maintainable dividend income before discounting that figure to arrive at a present day value. This method is more difficult to justify as it involves more estimation than other methods.

We are dedicated to your next step, and have the expertise to advise you on valuation matters.