Business valuation

What it means

A business valuation sets the value for a specific purpose: a sale, an investor, a non-cash contribution, a settlement between members or litigation. The purpose changes both method and answer.

Three approaches are used: income (future flows discounted to today), asset-based (assets less liabilities) and market (an EBITDA multiple from comparable deals).

The gap between the price paid for a business and the fair value of its assets less liabilities shows up in the buyer’s books as goodwill. So a valuation says not only what the business is worth, but how much of the price pays for things the balance sheet does not show: customers, the team and the name.

How it works in practice

The quality of a valuation rests on the quality of the books. Missing provisions, absent impairments or overstated stock will inflate every method equally.

In a sale the valuation meets the buyer’s due diligence, and the final price adjusts for net debt and working capital. That is why enterprise value and the price of a share are rarely the same.

Before a valuation we prepare a normalised profit figure: one-off items and the owner’s private costs run through the company are stripped out, and the director’s pay is adjusted to a market level. Only from numbers cleaned like this does it make sense to apply multiples or project future flows.

What to watch out for

A business resting on one person or one customer sells at a deep discount. The buyer pays for a business that runs without the seller, not for the seller’s personal relationships.

When an interest or a business changes hands between related parties, the price must match what independent parties would agree. A valuation done for show, without a method or workings behind it, will not satisfy the tax office, which adjusts the tax base by the gap to the market price.