By David Bloom, co-founder and CEO, fd unlimited
If you are in business to build something with a goal to sell it at some point in the future, you will naturally look at all strategic decisions through the lense of “will this increase the value of my business”.
You may have a figure in mind as to how much you would like to achieve when you sell. Along the way, it is a good idea to take a read on the value as you grow.
Whilst you can pay a lot of money to get a valuation done, there is a fairly simple method you can use to get a ballpark figure by multiplying your profit after tax by an appropriate PE multiple:
1. Take a note of your profit before tax for the last financial year.
2. List any non-recurring items of expenditure that distort the number. These could be one-off move costs, legal bills, recruitment fees etc that do not form part of the recurring expenditure of the business.
3. Adjust the profit before tax figure for the list of non-recurring items to get to a revised profit before tax.
4. Look in the FT or online for the latest PE ratios of public companies in your sector and list them.
5. Determine the average of the PE ratios and then apply a discount of about 30% to acknowledge that private companies are harder to sell than public.
6. Adjust for 21% Corporation Tax by multiplying your adjusted profit before tax by 79% to get to an adjusted profit after tax.
7. Multiply your adjusted profit after tax by the PE ratio in step 5 and this will give you a valuation.
You can apply the same approach to forecast to profit after tax and build a model that that will link company performance to valuation to help you determine what numbers you need to achieve the exit valuation you are looking for.
Take note this approach is just one of several valuation methods and a proper process should always be performed by an expert experienced in your sector. A business, like anything else for sale, is only worth what someone is prepared to pay for it. If you are fortunate enough, for example, to be right in the sweet spot of a foreign entity looking for a strategic purchase in the UK you could find the multiple is a lot higher than you expected.
If you would like a template that helps you calculate a ballpark valuation for your business or a list of good sites to help you determine PE ratios, please email us at email@example.com or call James Ashley 0203 008 4495.
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