Scots firms could be undervaluing their worth
There are many reasons for valuing private business whether you are considering investing, selling, transferring an interest in a business, setting up a tax efficient employee ownership scheme or looking to resolve a dispute.
Whatever your intention, fully understanding the value of the business in question is an important and useful exercise, allowing you to make the right decisions.
When considering the value of a business, the first thought of any valuer should be to consider the legal contracts which exist between the owners of a business, be that a company articles of association, shareholders’ agreement or any other formal agreements.
These legal contracts can be complex, however a full understanding of any requirements or conditions set out in these documents is essential to arriving at an appropriate value.
In relation to the valuation of private businesses, there are three principal methodologies:
Dividend yield valuation which is often used to value minority shareholdings. For interests in small unquoted businesses, where payment of dividends has been inconsistent in the past and cannot be assumed with any certainty in the future, a dividend-based valuation may not be appropriate.
A net asset valuation which is more applicable to investment businesses than ongoing trading businesses. However, net assets can be used as a useful cross check to an earnings-based approach for trading businesses where the relevant owner is such that the owner could affect the winding up of the business.
The most common approach for valuing a profitable trading business is an earnings basis which uses the future maintainable earnings of the business, to which an appropriate capitalisation factor – ie price-earnings ratio (P/E ratio) or EBITDA (earnings before interest, taxes, depreciation and amortisation) multiple – is applied to determine the value.
When using an earnings basis, and applying a multiple to future maintainable earnings, careful consideration should be given to publicly available information on the sale of comparable businesses operating in the same sectors and of a similar size in conjunction with financial information available for listed businesses operating in the sector to determine an appropriate multiple.
When assessing the reliability and relevance of information and putting into context of the business in question, there are many factors to consider and professional judgment to be applied in order to arrive an appropriate multiplier.
In some instances, after arriving at a valuation of a business as a whole, it may be necessary to consider the valuation of a minority shareholding.
When considering this, the full value of a business is usually discounted to reflect the fact that the shareholding being valued does not have control, and is therefore unable to direct that the business affairs are conducted in a particular way, or that its profits are distributed or that the value inherent in the shareholdings is realised either by sale or on a winding up.
The discount percentage normally escalates as the size of the shareholding reduces. In certain circumstances a premium may be appropriate if a minority shareholding gives a buyer additional control over the business.
At Anderson Anderson & Brown, we have a dedicated team of experts who can prepare valuations for companies, partnerships and sole traders.
We understand that each business is unique and because of this they each require a bespoke valuation service, tailored to their requirements.
To deliver this, we combine our specialist valuation skills with our commercial and market knowledge gained on the back of advising numerous clients on the acquisition or sale of businesses.
The right blend of sector experience and professional judgment makes a difference to what can be a controversial and complex subject.
We are experienced in all aspects of valuations including, commercial advice on strategic reviews and investment appraisals, undertaking and reviewing valuations for tax purposes, valuation of intangible assets, expert witnesses appointed during a legal dispute or an adviser to one of the parties in an expert determination and regulatory and accounting advice on valuations required by Accounting Standards.
Whether you are looking to create, unlock or understand the value of your business, our team are here to help.
Gordon Steele is a corporate finance partner at Anderson Anderson & Brown, chartered accountants and business advisors