Business valuation
Business valuation
An assessment of what a company is worth provides a basis for negotiation when businesses are bought or sold and when ownership changes. CorpLaw offers business valuation as a standalone service for acquisitions and sales, capital raising, investor entry, shareholder buy-outs and business succession. The purpose, valuation date and scope are agreed at the outset.
When is a valuation needed?
- Before a sale, to understand a reasonable price range.
- Before an acquisition, as a basis for the offer and negotiation.
- For capital raising and investor entry, to inform subscription pricing and ownership stakes.
- For shareholder buy-outs and other ownership changes.
- For business succession and transfers to the next generation.
- When a shareholders' agreement refers to market value.
What the assessment is based on
There is no single correct value. The result depends on the method used and the assumptions made. A valuation should therefore set out its premises clearly.
Method
The method reflects the business and purpose. Discounted cash flow considers expected future cash flows and required returns. Multiples compare relevant financial measures with comparable businesses or transactions where suitable data is available. Net asset value considers assets and liabilities. Methods can be combined to check reasonableness.
Underlying data
Annual reports, current accounts, budgets, forecasts and information about customers, contracts, investments and organisation are reviewed. Non-recurring items and owner-related costs need assessment. Data limitations and uncertainties are stated.
Profitability
Historical and expected profitability, and how dependent it is on individual customers or people.
Indebtedness
Debt and cash affect the value available to shareholders. Net debt, debt-like items, surplus cash and working capital need to be defined and assessed; not all cash is necessarily available to owners.
Risk and assumptions
Growth, margins, investment needs, customer dependence and market risk affect value. Assumptions are documented and sensitivity analysis illustrates the effect of changes. A range may be more meaningful than a single figure.
Enterprise value, equity value and purchase price
Enterprise value is the value of the operations before allocation between lenders and shareholders. Equity value is the value of the shareholders’ interests. The negotiated purchase price reflects the price and terms actually agreed.
- From enterprise value to equity value
- In simplified terms, equity value is derived by deducting net debt from enterprise value, subject to agreed adjustments. Debt definitions, cash, working capital and the valuation date can change the outcome. Negotiating leverage and alternatives then affect the price.
- Contract terms
- Warranties, earn-outs and payment terms mean that two offers at the same price may be worth different amounts.
- Buyer synergies
- A buyer may be prepared to pay more if the company fits particularly well with its own business.
Questions and answers
Is the valuation binding on the parties?
No, unless the parties have agreed so, for example in a shareholders' agreement. Normally it is a basis for negotiation.
What information is needed?
Usually annual reports, current accounts, budget or forecast, and information about customers, contracts and organisation.
Related services
Selling a business
Preparation, negotiation and limited liability when selling your company.
Buying a business
Review, negotiation and documentation when acquiring a company or business.
Capital Raising
Legal structure, agreements and corporate approvals for investments and financing.
Shareholders' agreements & buy-outs
Rules between shareholders and orderly exits when ownership changes.