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Realistic Valuations of Private Companies


Most private company owners are too polite to ask before we get the chance to sit down, but one question will certainly be asked at the start of every meeting:

“How much is my business really worth?”.

Unfortunately there is no straightforward answer.  It is not a simple matter  of taking profit or cash flow and calculating a multiple.  Any number of internal or external factors can reduce, or occasionally increase, the actual price achieved.  Over-reliance on the owner,  a dominant customer or erratic profits are just some of the things that can depress the value of a business.

Despite these limitations multiples of profit or cash flow remain the starting point for calculating the value of most private companies.  The difficulty is that some of the advisers a company owner might typically rely on can be spectacularly ill-informed about the multiples really achieved for private companies.  Private companies, and in particular small to medium private companies, sell on far lower multiples than the giant companies that dominate the financial pages of the business press.

So what multiples should be applied when putting a value on a private company?  When faced with this task these are the multiples we apply as a starting point to the adjusted operating profit before tax:

    For companies with sales less than £1 million per year, and profits less than £100k per year, two to three times adjusted operating profit before tax.

    For companies with sales between £1m and £5m per year, and profits between £100k and £500k per year, three times adjusted operating profit before tax.

    For companies with sales between £5m and £20m per year, and profits between £500k and £2m per year, progressively from three times to six times adjusted operating profit before tax on a sliding scale.

    For companies with sales of more than £20 million per year, and profits greater than £2m per year, multiples for manufacturing and service companies with strong brands or other intellectual property might increase to eight to ten times adjusted operating profit before tax.  For distribution companies multiples tend to stay at six times adjusted operating profit before tax.

These multiples are based on our experience buying and selling private companies over the last 20 years.  They assume a well run, stable company with no major weaknesses.  For construction companies, and other companies that rely on constantly winning new contracts to maintain turnover, apply a discount of at least 50%.

Calculating multiples is only the first step in valuing your company and these multiples should only be seen as an initial insight. If you are about to put your company on the market, or have an offer on the table, it is essential that you get the input of a professional adviser with extensive experience buying and selling private companies. A major weakness, strong growth, or the particular circumstances of a company can move a valuation outside these ranges, and an experienced adviser might save you from an expensive mistake. We tackle some of these issues in this article The Impact of Non-Financial Issues on Company Valuation.

You may find that some brokers or advisers quote higher multiples.  In our experience this means one of two things, either they have little practical experience selling private companies, or they are trying to manipulate a situation to their own advantage.  If you have been given a higher valuation of your company, especially if it is coupled with a high upfront costs, or a contract that ties you to a broker for 12 months or more, you should proceed with caution. We have written this article The Different Types of Business Broker to help private company owners understand the different types of broker active in the UK market, the type of broker that is best for their company, and the fees they should expect to pay.

If you are interested in finding out more about these and other issues relating to the sale of a private company one of our business sale experts would be delighted to talk to you in complete confidentiality. Click CONTACT ME to book an initial phone conversation or call us on 01604 432964.

We welcome comments on posts, and questions from our readers. Use the “Leave a Reply” box below. We answer all reader questions within 24hrs. If you would like to be informed about new posts on the theme of selling a private company click the “Subscribe” button at the right hand side of this page.

One comment on “Realistic Valuations of Private Companies

  1. Pingback: How to Choose a Business Broker | Select Business Sales

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