2023: a year in review
Tips from our webinar
How the expert approaches a business valuation as a single joint expert
In September 2023 we delivered our second webinar and looked in detail at how the expert approaches a business valuation as a single joint expert. In this article we cover three of the areas which were considered in the webinar. Key valuation methodologies • Future maintainable earnings: An ‘income approach’ - estimates future maintainable earnings and applies a valuation multiple, being the number of years a purchaser might expect to wait to recover the cost of investment (adjusted for net debt / surplus assets) before taxation. • Discounted cash flow: The ultimate ‘income approach’ which converts future cash flows to a current value using a risk adjusted discount rate. • Asset based valuation: A ‘cost approach’ which values a business based on its net assets with no reference to future performance. • Dividend yield: An ‘income approach’ relevant to minority shareholdings. • Entry cost method: Looks at the estimated cost to set up a similar business from scratch. • Industry precedent: In certain industries an indicative value may be derived from a multiple of income, number of customers or some other industry metric.
Calculation of value of Barbie Ltd adopting capitalised maintainable earnings
Calculation of value of Ken Ltd adopting an adjusted net asset valuation
Maintainable earnings (usually EBITDA)
Net assets in the latest balance sheet
A
=
£2 million
=
£8 million
Revaluation of property / investments to market value
B
+
=
£6 million
Earnings multiple
=
6x
A x B = C
Latent tax on gains in investment value
Enterprise value
=
£12 million
-
=
(£1 million)
Net cash / debt / working capital / surplus assets
D
-
=
(£2 million)
Obsolete stock
=
(£1 million)
C +/- D = E
=
Adjusted net asset value
=
£12 million
Equity value
=
£10 million
A, B and D are the key variables to assess...
The initial SJE enquiry - how can you help us? • Size of business - approximate turnover; approximate net assets (balance sheet); or, estimated number of employees. • Complexity and relevant experience - sector / nature of trade. • Any known additional instructions? - e.g. earnings, liquidity, review of bank accounts or additional dates for valuation.
Letter of instruction - what to include?
In addition to all the standard information (background, parties, instructions, compliance), it is immensely helpful to receive a copy of the last company financial statements including the detailed profit and loss account.
• Any deadline for enquiry response?
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