Valuing an unlisted business

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If you are looking to sell your business, you will need to know what it is worth. There are various valuation methods however when valuing a business for sale to continue trading, typically a value model is something like this:

Expected future annual profit before tax (HMRC require this to be provable by reference to finalised historic accounts)

Add any costs a new owner wouldn’t have to incur (e.g current owners pension contributions or rental payments to current owners)

Deduct any new costs a new owner would incur (e.g. commercial salary for roles currently undertaken by owners who are paid below market rate)

Deduct tax charge that would be inherent on this profit.

This gives expected future after tax profits for a theoretical new owner after paying full market rate for all managers.

This is multiplied by the expected price earnings ratio (p/e). Typically the p/e ratio is found by looking at the average for listed companies in the same sector but reducing to allow for small private company.  This is the most difficult part of the valuation as there are no definitive percentage to use.

The capitalised current value of the business is then expected future post tax profits x p/e ratio for this company.

This is then increased to give an unrestricted value (as required by tax law).  The theory being that a value based on real life shares has some inherent ‘restrictions’ on those shares.  This may require an uplift of say 10% for example.

The result is then shared amongst shareholders in proportion to shareholding.  However any shareholding less than 75% will then have a discount factor applied.  This could be as much as a 50% discount for a small minority holding. One exception to this is if the purchase of minority shareholding by another existing shareholder would result in that shareholder then having a majority in the business and therefore the minority shares have a higher inherent value due to the change in control that would result from their sale.

An asset based value is rarely useful (except in a property or investment company).  An asset based model assumes a break up of the company, which is presumably less valuable than continuing to trade.  If an asset based model (cash in all assets and distribute the cash) is more than the capitalised future profits then the asset based model would be used, but would beg the question of why is the company continuing to trade.

As with all of our tax tips and web pages this information is necessarily summarised and of a general nature.  If you would like detailed specific advice please contact us.

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Chartered Certified Accountant with qualifications in Environmental Conservation. Specialising in Supporting sustainable business, social enterprise and charities.