Yorkshire and North East Dealmakers Guide 2016 - 30

VALUATIONS AND MULTIPLES 30 SELLING YOUR BUSINESS of the financial performance of the business. As a general rule, staffing costs should be no more than 50 to 55 per cent of the overall turnover. ■ The lack of forward planning - a well thought-out and realistic three-year plan needs to have been written and aligned with the strategy for future growth. Ultimately, a business will be worth what a purchaser is prepared to pay, but there are ways of determining an accurate and reliable valuation and a realistically achievable multiple. Ian Marwood, from corporate finance firm Sentio Partners in Leeds, says: "There is a danger in some businesses that some of the principles of valuation are being misunderstood - it is unusual to go into a situation where people haven't overvalued." Marwood warns business owners that most valuers look at a multiple implied by the last accounts submitted, but that overlooks the company's current operating position. "When a sale is being negotiated the business has probably grown and at the point the deal is agreed, the run rate profit could be higher," he says. Getting a valuation is an integral part of deciding the best way to sell. Making that step requires a clear strategy. There are several formulae that can be used to determine a valuation and here we highlight each. 1. EBITDA Perhaps the most common method is a company's EBITDA (earnings before interest, tax, depreciation and amortisation). EBITDA is used to analyse a company's operating profit before these expenses are applied. 2. Discounted cash flow (DCF) Popular among businesses that are well-managed, asset-rich and have predictable incomes. The value is calculated over the investment period, using the expected cash return, less a discount for the time value of cash. It can be used to determine a company's current value, according to its estimated future cash flows. IAN MARWOOD 3. Valuation based on income Based on the cash flows that intangible assets held by a business would generate over the remainder of its life. However, an intangible asset can be valued only if it can be separated from the business or its people. 4. Valuation by cost How the business would cost to buy or replace an asset owned by the business. This is mostly adopted when pricing businesses dealing in intangible assets (software or research data). 5. What the market is prepared to pay The value of an asset should reflect the price for which similar intangible assets were sold in a similar deal by a similar company. While this method is quite simple, no two businesses are the same; even the closest of rivals will differ in size, market position, brand awareness and investment levels. 6. The sector standard Standards of valuation has become the norm in certain sectors. A case in point is the professional services sector, in which firms typically use a multiple of gross recurring fees to calculate its worth. 7. Looking at net assets This is where a valuation is obtained from analysis of the company's net assets from its balance sheet. This method is practised mainly by investment firms, property companies and other asset-rich businesses.

Table of Contents for the Digital Edition of Yorkshire and North East Dealmakers Guide 2016