How to maximise your company’s share value, part 2 – Share Valuation

It’s time to consider the value of your shares in the Company you (or your family) have helped to create, but how do you value them?

This is a leading question. For example, in the late 1990s, new technology businesses which had a feasible business plan were being valued at millions of pounds… based on optimistic and extremely hopeful projections. This unrealistic valuation would apply even if the business was new, was losing hundreds of thousands of pounds and had no material assets to speak of.

Indeed, this subjective method of valuation still applies to some businesses today. For example, Tesla Motor Company became valued at over $50 billion (more than General Motors Inc or the Ford Motor Company Inc) in April 2017, on the basis of future car-buying development projections, even though it had never made a profit at the time of valuation.

These aberrations aside, there is a generally accepted method of assessing the value of family companies in established trading sectors.

How valuations are calculated

The most important factor for a buyer (or their funder) is the level of sustainable future earnings (i.e. net profitability). This method of valuation is typically calculated as:

[EBITDA x [relevant business sector multiple]] + Completion Date value + Assets held – Debt

This calculation seems impenetrable at first glance, but let’s break it down piece by piece.

EBITDA is “Earnings Before Interest, Tax and Depreciation and Amortisation” and will be calculated by your accountants; it is generally net income, with the value of interest, tax, depreciation and amortisation added back.

The relevant business sector multiple will depend on the trading sector of the company’s business and the prevailing business appetite for such businesses. Typically, for an average sector business, the relevant multiplier might be 5.

The Completion Date value of excess cash is cash held in excess of regular, average working capital requirements.

Assets held include land, listed investments, art, technology and more.

Debt is self-explanatory.

To use an example, if a company’s EBITDA were £500,000 and the company has £25,000 of debt, with no assets (i.e. it leases its property, equipment and cases), the basic value might be:

[£500,000 x 5] – £25,000 = £2,475,000

But this also shows that the value of any assets OR any debt is only taken once, at the market value. If any assets can be realised in advance of the Share Sale to evidence an uplift in ongoing sustainable profits, this will have a significant uplift on the overall share-value calculation.

But, any on-going drain on profits and/or unnecessary overhead costs should be managed out of the business before the valuation occurs.

Remember, plan for your Share Sale. As the saying goes, “To fail to prepare is to prepare to fail”.

If you want to maximise your company’s share value, Astle Paterson can provide you with the expert legal advice you need. Get in touch on 01283 531366.

Contact our Corporate Department today

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