Valuing a company

[alanc5]

Anyone know much about how to value a company?

Hypothetically, if I owned a small software company who's primary product pulled in about £600k / year in profit, how much would that company be worth?

Assuming the market was steady etc, and that's including brand, website...the whole works.

THanks.

[whoozit]

My father-in-law has just sold his share of the company to the other director. IIRC, the accountants did a valuation on the basis of 6-8x net earnings but with no real justification for that range. He also calculated realisable cash on winding the company up, including outstanding orders, working capital, and machinery.

[rje]

Companies can be valued on a number of basis, three main ones -
1) discounted cash flow / future profit potential of the business,

2)a simple multiple of profit (a proxy for 1 above)
or
3) net assets.

1 and 2 are more normally used as this assumes a value for the ability of the company to generate future profitabiltiy, they also assume the value is more than net assets and as such intangibles such as good will and the name etc ahve some value.


Most acocuntancy partnership will be able to provide a valuation service or alternatively tty to find the price that comparable business have sold for and work out the Price / Earnings (EBITDA or EBIT)ratio and use that. Another alternative would be to look in the Financial Times at PE ratios then apply a large discount rate and use this as an indicative starting popint.

At the end of the day a business is worth what someone is willing to acquire it for.

Hope this is of some help.

R

[Billsnemesis]

Mostly valuation is an expression of opinion but there are some factors that go into the mix:
- trading history
- market forecasts
- customer base
- goodwill
- product range
- intellectual property

If you have a new product protected by IP rights that is selling well to a strong and broad customer base you will get a good price for the company. At the opposite end of the spectrum a business flogging a dead horse that is on the brink of becoming obsolete to one customer who is sticking around only because of loyalty to the proprietor isn't worth much.

All of these factors affect the risk attached to the investment and if there is a significant risk then the price will be lower.

[alanc5]

Thanks fellas.

[Stella star]

There are a number of ways of valuing a company and also you may be aiming for a high or low value for different reasons.

Incidently the IR seem to be challenging a lot of valuations done by professional valuers - they have their own valuation division that seems to have different ideas

[shadowninja]

Stella star said:

There are a number of ways of valuing a company and also you may be aiming for a high or low value for different reasons. Incidently the IR seem to be challenging a lot of valuations done by professional valuers - they have their own valuation division that seems to have different ideas

Interesting. Which method do they use?

I've played with Practical Business Valuation which has a shed load of different valuation methods...