Business / Share Valuations

A complete business valuation often provides an objective starting point for both buyers and sellers of businesses.   Without a professional valuation, the seller may be ill prepared to meet with buyers, especially if the buyers have a more accurate idea of the value of the business.  In short, without a comprehensive business valuation you may be leaving money on the table, and not even know it!

Strictly speaking, a company's fair market value is the price at which the business would change hands between a willing buyer and a willing seller when neither are under any compulsion to buy or sell and both parties have knowledge of relevant facts.  This is a somewhat circuitous statement because it begs the question, "How do buyers and sellers arrive at this value?"

Arriving at the transaction price requires that a value be placed on the company for sale. The process of arriving at this value should include a detailed, comprehensive analysis which takes into account a range of factors including the past, present, and most importantly, the future earnings and prospects of the company.

There are a large and varied number of valuation methodologies which are commonly used to value a business.  These include:

·    Asset-based valuation
·    Comparable transactions analysis
·    Comparable public company method
·    Discounted cash flow.

Sale structure will also affect valuation.  With a limited company it is normal to sell the shares of a business (a share transfer).  Any deal will include therefore the net asset value of the company, being the balance sheet reserve of a company.  This will alter through normal trading fluctuations.

Sole-traders and Partnerships are usually sold on a fixed asset and goodwill basis (a goodwill and asset sale).  Typically the seller will keep their bank account, leaving the buyer to stump up working capital.  Most buyers will account for working capital requirements by reducing the goodwill they are paying by the level of working capital, so they get an overall multiple.

Buyers will also seek to only pay the true resale value of assets, not the book value in the accounts.  In the purchase of a limited company, ascertaining the true asset value is part of the due diligence process.  Due diligence also seeks to discover any contingent liabilities (potential liabilities), that the balance sheet does not show, but which the buyer may inherit with the shares they buy.


Factors Affecting Calculated Valuation
Having calculated the value of your business, should you accept an offer of that amount from a purchaser?  

The answer – it depends

In order to obtain the best price for a business it is essential to have in mind the likely buyer or, better still, several buyers in order to obtain maximum market appeal.

The optimal purchaser is one who has a ‘we want, we need’ motivation:

·    Willing to pay a premium
·    Can add value by synergy or economies/management
·    Has vision for the business
·    Does not have regulatory/monopoly constraints
·    Has the funds and the strategy today
·    Understands the business and has the people to run it

Buyers such as these are often called “key” buyers and their identification can strongly influence a valuation.

Throughout the valuation process, it is important that the purpose of the valuation be kept in mind.  Although a valuation can serve many purposes, if the aim is to sell the business, then the valuation should objectively determine the fair market value of the business. This objective market valuation should also take into account the synergies and fit that the business may have with potential buyers.  In addition to valuing a business for an impending sale, a business valuation can also be required for legal proceedings, estate planning, shareholder disputes and for capital raising.


For more information on this service please contact

Patrick O’Hare
Tel: 046 943 7900
Mob: 086 608 8869
Email: pohare@ohd.ie



 
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