If you’ve established your own business or company, you may well have wondered what it’s worth. You’ve invested personal wealth, not to mention effort and emotion, and your business may well form a significant part of your net worth, but, unlike a shareholder in a listed company, you have no easy way to work out its value.
Value may only become important when you want to sell. However, the value of private company shares can be relevant for tax purposes too. Most obviously the value is incorporated into your estate on your death, but share value can also impact on succession planning for making gifts to the next generation and employee incentives.
Where a market value is required for tax purposes the legislation makes up for a lack of real market by requiring the valuer to imagine a transaction between a willing buyer and seller.
The valuation approach will depend on the nature of the company’s business. With investment companies, the starting point is often the balance sheet, although if regular dividends are paid one might capitalise that income stream. Investment assets may be held at cost and require revaluation to bring the balance sheet up to current value.
For a profitable trading entity we would generally value on the basis of earnings, looking at the company’s trading past as an indicator of future results. So we would usually calculate average profit or earning levels over the recent past and adjust for one off items of income or expenditure which a potential purchaser could not expect to recur.
Armed with a view of the company’s ‘maintainable’ profit, the next step is to identify an appropriate multiple for earnings capitalisation to arrive at a company value. Private companies are very different from their listed counterparts, so a quoted PE or index is unlikely to be a good match, but it may be the best available. EBIT and EBITDA multiples are compiled from private sale transactions and may give a more suitable result, particularly if the company has significant debt as interest costs can obscure the underlying value.
For tax valuations, the result of the imaginary transaction is open to scrutiny by HMRC’s valuation specialists. Back in the real world a valuation can provide a starting point for a commercial transaction and can give insight into the factors that a purchaser will consider.
If you’d like to talk to us about valuing your company please contact Clare Munro at firstname.lastname@example.org