The valuation of a company is assessed through what’s known as a business valuation. Valuing a business is an art form conducted by an experienced and qualified business valuer, for which the findings are then compiled in a business valuation report.
How are companies valued?
A company valuation aims to work out the market value of a business and is typically conducted by a RICS registered valuer; a professionally qualified individual that adheres to industry regulations when calculating the value of a business.
In response to how are companies valued, many techniques can be used to value a company, from entry cost and discounted cash flow to price-to-earnings ratio. There are also different types of business valuations suitable for different purposes, such as:
- Standard business valuation
- Probate valuation
- Matrimonial valuation
- Property valuation
- Investment property valuation
The findings in the business valuation report will differ based on the type of business valuation that you choose.
What is a business valuation report?
A business valuation report identifies assets and liabilities that are subject to the valuation, alongside basic instructions and the current rateable value. A business valuation report first runs through the terms of the valuation, methodology and then a breakdown of the business/property and the market value.
The typical structure of a business valuation is as follows:
1 INSTRUCTIONS
- Address of Business to be valued
- Identification and Status of the Valuer
- Identification of the Client and any Other Intended User
- Purpose of Valuation
- Identification of the Assets or Liability to be Valued
- Basis of Value
- Date of report, inspection, and valuation
- Extent of Investigation – Basic or additional checks, such as an asbestos survey or fire risk assessment
- Nature and Source of the Information Relied Upon – Assumptions and special assumptions
- Restrictions on Use, Distribution or Publication
- Personal Liability – The client agrees not to bring any claim against individuals, such as employees, directors, and consultants personally in connection with the services provided.
- Liability Cap - Liability arising out of, or in connection with the valuation, whether arising from negligence, breach of contract or any other cause whatsoever, shall in no event exceed a specified value, including exclusions, such as fraud, death or personal injury.
- Conflict of Interest – Declaration of previous involvement
- Confirmation of Professional Indemnity Insurance
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
2 LOCATION – Address
3 PLANNING – Permissions granted
4 ENERGY PERFORMANCE CERTIFICATION (EPC) – EPC rating
5 THE PROPERTY – Assumptions relied upon
6 DESCRIPTION – Details of the business/property subject to valuation
7 RATEABLE VALUE - Current rateable value
8 TENURE – Rent or lease per annum
9 THE BUSINESS – Brief history, financial performance, staff structure and liabilities, such as staff wages
10 VALUATION - Open market value based on the information supplied and the valuer’s knowledge and experience of commercial business sales.
The business valuation report will then be signed by the business valuer and shared with the relevant party.
A business valuation report will vary based on the supplier, the type of business and the type of business valuation that is carried out as this will determine what party to act in the best interests of.
For more information on how a business is valued and how to understand the methodology behind it, get in contact with a member of the Selling My Business team of business brokers and valuers.
