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How to establish a company’s valuation

If you’re looking to merge with or acquire another company, you’ll want to make sure that company valuations are correct. Lots of mergers fail because one company has overvalued what their business is worth. This is easily done, because there are lots of biases that come into play, and valuations might seem simple, but they really are not. There are lots of factors to take into consideration when a business is valued and you will need a professional to do it for you.


So, how do you establish a company’s valuation?

What is a business valuation?

A business valuation is a careful valuation of your business and its market value. It isn’t as simple as what your revenue is. Business valuations are determined by lots of things, including what competitors are out there and where your industry is heading.


Even if you are not selling your business, it will be useful to have a valuation. They can help you with:


  • securing investment when you need it,
  • setting a fair share price,
  • growing or expanding your business,
  • filing your taxes,
  • establishing a business partnership.

How do you value a business?

There are a few different ways you can value your business and it is a good idea to use several methods to make sure you get roughly the same valuation whatever way you do it.


The main methods people use to value their business include:


  • Price to earnings ratio: there are calculators online you can use to work this out. It is the ratio of a company’s share price to the company’s earnings per share.
  • Entry cost: This is the predicted cost to set up a similar business to the one being valued.
  • Asset valuation: this method of valuation takes into consideration any assets in the form of stocks, buildings, equipment, brands and goodwill.
  • Discounted cash flow: widely used in investment finance, real estate development, corporate financial management, and patent valuation, discounted cash flow looks at the time value of money.
  • Industry rules of thumb: instead of valuing your company based on specific calculations, industry rules of thumb values it based on experiences and estimates in the industry, such as the value of similar companies.
  • Valuation based on what can’t be measured: This is essentially valuing your business based on what someone is willing to pay for it. This might happen if someone makes you a reasonable offer without a proper valuation. It might still make sense to get a valuation, or else you might find you let your business go for much less than it is worth.

What affects a business valuation

If your business valuation is lower than you thought it would be, you might be wondering what parts of your business impact it.


There’s the obvious stuff, like assets and stock. But what else affects your business valuation?


Well, there’s some not so obvious things, such as your company’s reputation within the sector. If it’s good, your business is obviously worth more, because your company is highly likely to grow. If it’s bad you might be at risk of closing if you don’t turn that around, so your company will obviously be worth less.


If you own trademarks, that can increase the value of your business, as can a high value customer base.


Your team can be valuable assets and can increase the valuation of your business. If you have very talented staff members, you should be doing everything you can to retain them.


Your valuation can also be impacted by the type of work you do and the product you sell if you sell one. If you’re in a growing market your company will be worth more, especially if you have been doing what you do for a long time. But you must be moving with the times. Business is fast paced these days, so you need to be operating in a way that is determined as industry best practice, or you have no chance.

Yorkshire Change can help

Yorkshire Change can help you to get a fair and realistic valuation of your business, whether you are looking to sell or not. If you are looking to merge with or acquire another company, or if you are looking to sell, we can help you through the entire process from start to finish.


We’ll integrate into your team, helping you to set up the correct support networks to make sure due diligence is done and giving you the absolute best chance of achieving what you set out to do.


You should not underestimate the input of professionals, since more M&As fail than succeed, and the absolute best chance you have is to bring onboard a knowledgeable team of experts.


For more information on how we can help you, please fill in the contact form on our homepage, and someone will get back to you. We’ll help you deliver value through change.

We look forward to speaking to you.


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