By Michael Pay, Director, EMC Corporate Finance
The question we are most often asked by business owners is, “what is my business worth?” It would make life a lot easier for us, and more satisfying for the people asking the question, if there was a straightforward answer. But as I’ll endeavour to explain here, a number of factors can influence a valuation.
A combination of reduced profits, falling multiples and a lack of business confidence have resulted in a significant erosion of value for many business owners over the past five years. But with the end of the recession, the prices being paid are finally on the rise.
Larger corporates have hoarded cash – one estimate puts the FTSE 100 group of companies sitting on £200 billion of cash reserves – and the private equity industry has raised billions more. The Wall Street Journal estimates venture capital and private equity firms have a staggering $1.2 trillion of uninvested cash. As a result there is increasing pressure on both these groups to do more deals. In order to better understand business valuations, whether buying, selling or raising money, it is important to understand some of the underlying principles used by purchasers.
What a business is worth is basically a combination of how much money a buyer can make from it weighed against the risks of achieving that profit. Previous profitability and asset values are just the starting point.
