Company Valuations
Company Valuations: How Much Is Your Company Worth?
Understand how company valuations work, the methods used to value UK private companies and the factors that can increase or reduce the value of your business or shares.
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What is a company valuation?
A company valuation estimates what a business, or a particular shareholding in that business, is worth at a specific date. For UK private companies, valuation commonly considers sustainable profits, cash flow, assets, debt, comparable transactions, future prospects and the rights attached to the shares being valued.
There is no single formula that gives the correct value for every company. A profitable trading company may be valued using maintainable earnings or EBITDA multiples, while an asset-rich company may be better suited to a net asset approach. Discounted cash flow can also be appropriate where reliable future cash flows can be forecast.
How much is my company worth?
For many owner-managed companies, the starting point is the sustainable level of earnings that a buyer could reasonably expect the business to generate after adjusting for unusual, personal or non-recurring items. A suitable valuation multiple may then be applied.
Maintainable Earnings × Appropriate Multiple = Indicative Business Value
However, the multiple should not simply be guessed. The appropriate multiple can depend on the company's sector, size, growth prospects, recurring revenue, customer concentration, management structure, dependence on the owner, financial risk and evidence from comparable businesses or transactions.
Why might you need a company valuation?
Company valuations are used for much more than selling a business. Directors and shareholders may need to establish a defensible value for commercial, tax, succession or investment purposes.
Selling a company
Establishing an indicative value can help shareholders prepare for negotiations and understand how a potential buyer may assess the business.
Raising investment
A valuation can help determine the percentage of equity an investor receives in return for new capital.
Transferring shares
Shares transferred between family members, employees or other shareholders may require consideration of market value and tax.
Succession planning
Understanding company value can help owner-directors plan retirement, family succession or a management buyout.
Tax purposes
Market value can become important for Capital Gains Tax, employee share arrangements, inheritance planning and certain connected-party transactions.
Shareholder matters
A valuation may be required when shareholders enter or leave a company or where the value of a particular shareholding must be considered.
Company valuation methods used in the UK
The appropriate valuation method depends on what is being valued and why. Professional valuations may consider more than one approach, using alternative methods as cross-checks where appropriate.
| Valuation method | Often relevant for | What it considers | Main limitation |
|---|---|---|---|
| Earnings / EBITDA multiple | Profitable trading companies | Sustainable earnings and an appropriate market multiple | Value is sensitive to earnings adjustments and the multiple selected |
| Comparable companies / transactions | Businesses where useful market evidence exists | Prices and multiples observed for similar businesses | No two private companies are identical |
| Dividend yield | Established dividend-paying shareholdings | Expected sustainable dividends and required investor return | Less useful where dividends do not reflect underlying capacity |
| Net asset value | Property, investment and asset-rich companies | Market value of assets less liabilities | May not fully capture trading goodwill |
| Discounted cash flow (DCF) | Businesses with reasonably forecastable cash flows | Present value of expected future cash flows | Highly sensitive to forecasts and discount rates |
Valuing a company using earnings or EBITDA
Earnings-based valuations are commonly considered for profitable trading businesses. Rather than blindly multiplying the latest accounts profit, the first task is normally to determine a representative or maintainable level of earnings.
Depending on the circumstances, this may involve reviewing several years of financial results and considering adjustments for items that would not be expected to continue under normal ownership.
Worked company valuation example
Assume a company reports EBITDA of £160,000, but its accounts contain a genuine £10,000 one-off professional cost and £5,000 of other non-recurring expenditure.
| Calculation | Amount |
|---|---|
| Reported EBITDA | £160,000 |
| Add back genuine one-off professional costs | £10,000 |
| Add back other evidenced non-recurring costs | £5,000 |
| Illustrative adjusted EBITDA | £175,000 |
If, purely for illustration, relevant market evidence supported a multiple of 4:
This does not automatically mean the shares are worth £700,000. Debt, surplus cash, non-operating assets and other adjustments may be required before arriving at equity value.
Enterprise value vs equity value: an important distinction
One of the most common sources of confusion in company valuations is the difference between the value of the underlying business operations and the value attributable to shareholders.
Enterprise Value
Broadly represents the value of the operating business before taking account of how it is financed.
Equity Value
Represents the value attributable to shareholders after appropriate adjustments for items such as debt, cash and non-operating assets.
The precise adjustments depend on the transaction and the definition of debt and working capital being used. This is one reason why a headline “multiple of EBITDA” should not automatically be treated as the amount a shareholder would receive on a sale.
Net asset company valuation
An asset-based valuation can be particularly relevant where the value of the company comes primarily from assets rather than trading profits. This can include property investment companies and some holding companies.
Simple net asset valuation example
| Asset / liability | Illustrative value |
|---|---|
| Investment property | £900,000 |
| Cash | £120,000 |
| Other net assets | £80,000 |
| Less: borrowings | (£350,000) |
| Less: other liabilities | (£50,000) |
| Illustrative net asset value | £700,000 |
A full valuation may require assets and liabilities to be considered at appropriate current values rather than simply copying their accounting book values from the balance sheet.
Discounted cash flow company valuation
A discounted cash flow (DCF) valuation estimates the present value of cash the business is expected to generate in the future. Forecast cash flows are discounted because £1 received in the future is not economically equivalent to £1 received today and because future cash flows involve risk.
DCF can be particularly useful where a business has credible financial forecasts and its future cash generation cannot be adequately represented by a simple historic earnings multiple.
What increases the value of a company?
Buyers do not value profit in isolation. They also consider how likely those profits are to continue and how much risk they must accept to obtain them. As a result, businesses with similar current profits can command very different valuations.
Factors that can support value
- Recurring or contracted revenue
- Diversified customer base
- Consistent revenue and profit growth
- Strong management below the owner
- Reliable management accounts
- Documented systems and processes
- Valuable intellectual property or brand
- Strong cash conversion
- Low reliance on individual customers or suppliers
Factors that may reduce value
- Heavy dependence on the owner-director
- One customer representing a large proportion of sales
- Declining or volatile profits
- Poor-quality financial information
- Unresolved tax or legal risks
- High working-capital requirements
- Loss of important contracts
- Excessive borrowing
- Weak barriers to competition
Company valuations for HMRC and tax purposes
A commercial asking price and a valuation required for tax purposes are not necessarily the same exercise. Where UK tax legislation requires market value, the relevant statutory valuation basis and the facts at the valuation date must be considered.
For unquoted company shares, relevant evidence can include recent arm's-length transactions in the shares, financial performance, maintainable earnings, dividends, comparable companies or transactions, assets and the particular rights attaching to the shares.
HMRC's Shares and Assets Valuation division deals with valuations of unquoted shares for relevant tax purposes. The amount of information required and the appropriate valuation approach depend on the transaction involved.
Gifting company shares
A gift or transfer of shares can create tax consequences even where no cash changes hands. The market value of the shares may therefore be important for Capital Gains Tax and other tax considerations.
Read our guide to gifts and Capital Gains Tax.
Selling a company
The eventual sale price is determined by negotiation and deal terms, but an independent valuation can help shareholders understand the financial basis on which buyers may assess the business.
Owners considering an exit may also want to understand Business Asset Disposal Relief (BADR).
What multiple should I use to value my company?
There is no standard EBITDA, profit or revenue multiple that applies to every UK company. The appropriate multiple should reflect available market evidence and the characteristics of the business being valued.
Relevant considerations may include:
Business quality
Growth, margins, recurring revenue, competitive position and customer retention can influence how a buyer views sustainable earnings.
Risk
Customer concentration, owner dependence, regulation, supplier risk and volatile trading can affect the multiple a buyer is willing to pay.
Market evidence
Transactions involving comparable private businesses and appropriate quoted-company evidence may help establish a supportable range.
How is a company valuation carried out?
A well-supported valuation normally starts with understanding the business before applying a formula. The process may include the following stages.
What information is needed for a company valuation?
The information required varies according to the business and purpose of the valuation, but commonly includes:
Financial information
- Recent annual accounts
- Current management accounts
- Financial forecasts where available
- Details of debt and cash
- Breakdown of exceptional items
- Director remuneration
Company information
- Share capital and ownership
- Different share classes and rights
- Articles and relevant shareholder agreements
- Major customers and suppliers
- Recent share transactions
- Material commercial risks
Is company valuation the same as the eventual sale price?
No. A company valuation is an estimate or opinion of value based on a particular set of assumptions and a particular valuation date. The price ultimately agreed between a buyer and seller can be different.
Strategic buyers may be willing to pay more because they expect synergies, while deal structure, competition between buyers, financing, warranties, deferred consideration and earn-outs can all affect the headline price and the amount ultimately received by shareholders.
Company valuations require judgement, not just a formula
The arithmetic behind a valuation can be simple. Determining the sustainable earnings, appropriate methodology, relevant market evidence and risks is where professional judgement becomes important.
For owner-managed limited companies in particular, reported accounting profit may need careful analysis before it represents the earnings a hypothetical purchaser would expect to acquire.
The Online Accountants are ACCA qualified accountants specialising in owner-managed limited companies throughout the UK.
Company Valuations: Frequently Asked Questions
How do you calculate the value of a company?
There is no universal calculation. Profitable trading businesses may be valued by applying an appropriate multiple to sustainable earnings or EBITDA. Asset-rich companies may be valued by reference to net assets, while businesses with reliable forecasts may also be assessed using discounted cash flow. Market evidence should be considered where available.
What is the most common company valuation method?
Earnings and market-multiple approaches are commonly used for profitable trading companies, but the appropriate method depends on the nature of the company and the purpose of the valuation. Asset and discounted cash flow approaches can be more appropriate in other circumstances.
Can I value my company based on turnover?
Revenue multiples are used in some industries, but turnover alone does not show profitability or cash generation. Two businesses with identical turnover can have substantially different values because their margins, growth, recurring income and risk profiles differ.
How many times profit is a company worth?
There is no fixed multiple that applies to every company. The appropriate multiple depends on factors such as the sector, company size, sustainable growth, recurring revenue, customer concentration, management dependence, financial risk and evidence from comparable businesses and transactions.
What is EBITDA in a company valuation?
EBITDA means earnings before interest, tax, depreciation and amortisation. It is commonly used as a measure of operating earnings when comparing businesses, although it is not the appropriate basis for every company and may require normalisation before use in a valuation.
What is adjusted EBITDA?
Adjusted EBITDA attempts to identify a representative level of ongoing operating earnings after considering genuine exceptional, non-recurring or non-commercial items. Any adjustment should have a clear commercial justification and supporting evidence.
Does cash in the bank increase company value?
Potentially. Where a valuation method produces an enterprise value, appropriate surplus cash may be added and debt deducted when moving from enterprise value to equity value. The treatment depends on the circumstances and transaction terms.
Is a 25% shareholding worth 25% of the company?
Not necessarily. The value of an individual shareholding can depend on voting power, control, dividend and capital rights, transfer restrictions, marketability and the circumstances of the valuation. A simple pro-rata calculation may therefore not represent market value.
Does HMRC value private company shares?
HMRC's Shares and Assets Valuation division deals with the valuation of unquoted shares and other assets for relevant tax purposes. Depending on the transaction, taxpayers may need to provide financial information, details of the share rights, recent transactions and an explanation of how the proposed value has been calculated.
Do I need a company valuation when gifting shares?
A share transfer by way of gift can have tax consequences even when no money changes hands. Where tax legislation requires market value, establishing and documenting an appropriate share valuation can therefore be important.
Can an online company valuation calculator give an accurate value?
A calculator can provide a rough indication, but it cannot normally assess all the factors relevant to a private company, including the quality of earnings, comparable transaction evidence, share rights, owner dependence, customer concentration and the purpose of the valuation.
How can I increase the value of my company before selling?
Value may be supported by improving recurring revenue, reducing reliance on the owner, diversifying customers, strengthening management, improving financial reporting, documenting processes, resolving tax or legal uncertainties and demonstrating sustainable profit and cash-flow growth.
Need help with a company valuation?
Whether you are considering a share transfer, planning a business sale, preparing for retirement or need to understand what your company may be worth, we can help you assess the financial information and valuation issues involved.
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