A valuation is required when the owner of a business (or other stakeholder) needs to determine the ‘fair market value’ of either the entire share capital or a certain number of shares in a business.

A valuation could be required for a number of reasons, but all come down to a real or hypothetical change (or part-change) in ownership – it could be sale/purchase of shares, inheritance, granting of employee share options, investment/acquisition, refinancing, shareholder dispute or divorce.

In each case, a professional valuation will be prepared on an independent basis to determine the inherent value of the shareholding in the business. The value is distinct from the price in that the value assumes a non-specific acquirer and a willing seller, both acting in their own best interests in an open market, whereas the price is what a specific buyer is willing to pay and the current owner is willing to sell for.

A valuation will most often look at the earnings of the business and apply a market multiple (generally based on similar businesses or the market as a whole) or may look at the net assets on the balance sheet. Generally a trading business will be valued on earnings whereas an investment business or non-trading business (including insolvent businesses) will be valued on a net asset basis.

An alternative valuation method is based on calculating the net present value of the expected future cash flows of the business, although this will rely on forecasts or projections being available (and the forecast assumptions being reasonable).

When preparing a valuation it is important to consider what is being valued, for whom the valuation is being prepared, and what the purpose of the valuation is. This will help determine the appropriate format, level of detail and approach.

Other factors that will impact the value of a business include size, maturity, liquidity, industry, location, economic climate, financial performance, market risk.

Often adjustments will be made to the reported earnings to ensure rent, directors’ remuneration and operating expenses are all shown at a normal level – non-recurring or non-operational income and expenses should be excluded, and adjustments made for one-off events that are outside of the normal course of business.

Discounts may be required – to the market multiple and to the value of the shareholding – to reflect the size and risk profile of the target business compared to the market/comparable companies being used as a benchmark; to reflect the lack of control in a minority shareholding; and to account for the illiquidity of owning shares in a private company (meaning there may not be a ready market to sell the shares in the future).

A high degree of judgement is required in any valuation; no two businesses are the same. Just as the value of the market as a whole changes over time for a multiple of reasons, many internal and external variables might effect a private business, which could have a significant impact on the value, at any given point.

A professional valuation should consider both the enterprise value (a multiple of underlying earnings) and the equity value (the enterprise value plus the shareholder’s right to excess cash in the business). This may consist of reviewing the true value of fixed assets (both tangible and intangible), the level of cash/debt in the business, and gaining an understanding of the normal level of working capital required to maintain business operations.

The Corporate Finance team at Shaw Gibbs provide clients with robust, detailed, independent valuations to assist with share buy-backs, MBOs, MBIs, EOTs, shareholder disputes, family court valuations, exit planning, raising finance, employee share schemes, IHT.

We can also advise on structuring and implementing any sale or transfer of shares, provide financial due diligence or advisory services on business transactions, as well as offer assistance to enable any funding required to facilitate the purchase of shares.