Selling your business part 2 of 3


VALUES AFFECTED BY FACTS OR ASSUMPTIONS
In the second of his series of three articles about preparing your business for sale, Peter Savage explains the ins and outs of valuing businesses.
Last month we looked into some basic calculations that are used to value companies. This month I will try to put some of those principles into practice. I will look at – on a no names basis – three companies, all in the same industry, studying the make-up of their accounts to see what I believe the value is of each one.
Remember, as always, these are only my valuations and so they come accompanied with the appropriate health warning.
The background
First let’s just run through some of the details that apply in these calculations:
I will use the five times super profit equation. This effectively excludes any value within the business’s balance sheet; it simply values the business through the profit and loss figures. This example is most used by banks when lending to fund small and medium enterprise (SME) purchases.
I will also use only information that is at Companies House – available to the public – so that I don’t breach any kind of confidentiality (just in case someone is able to identify the company from the example).
Company one: a large business
Our first company has a turnover of £38 million and, out of this, has a pre tax profit of £2.8 million. The balance sheet stands at just over £7 million. The highest paid director takes about £400,000 and the company has 131 employees. The company could be described as a large concern, probably at the top end of size within its industry sector.
So, using the super profit rule: take the pre-tax figure and add the cost of the main director (assuming that he or she is no longer required within the business) then multiply by five: £ 2.8m + £400,000 x 5 which gives a valuation of £16 million.
Company two: a small business
The second company is a well-established business that, due to its size, falls into the small company bracket (it does not meet two of these three criteria: turnover is not over £5.6 million, balance sheet is not greater than £2.3 million, it has no more than 50 employees). The advantage to the directors of a small company is that they do not have to publish anywhere near as much information, if they don’t want to. They can file abbreviated accounts and do not need to disclose the company’s turnover or the directors’ salaries. So we don’t have two of the figures needed to calculate the company’s value using the five times super profit equation ... making the exercise we are carrying out more difficult.
The company has a balance sheet that stands at £1.9 million (up from £1.6 million). The turnover is not shown and nor are details of director’s salaries. So there’s not much to work on; we have to make assumptions.
First, in a company of this size the directors will be fairly key to the running of the business – so we keep them in the equation. Secondly, the profit before tax is likely to be around £430,000 (the difference between the two years’ balance sheets plus adding the tax charge of 30%). So, the super profit valuation is: 5 x £430,000 = £2.15 million which is the balance sheet and a little bit more.
Company three: a struggling business.
The final company is one that has a balance sheet that stands at about £900,000. Turnover has dropped from £500,000 to £450,000 a year and the company has posted a small loss of £90,000. No dividends were paid and the director took a small salary of about £18,000.
This company cannot be valued by the super profits rule as there is no profit, even if the director’s salary is added back. The owner of this business will have a dilemma in selling as, on paper, the company is worth nearly £1 million but the assets are not returning enough income over costs to make a profit.
How this owner is going to make the most of his position will be discussed in the next article: gearing up for sale.
If you would like to give me your views on these or other companies, send them to me at peter.savage@azule.co.uk or make your comments on the blog at www.azule.co.uk/articles.asp where you can also read previous articles in this series.

Tags: finance | business | selling your business | values | super profit | iss019 | N/A
Contributing Author N/A

Read this article in the tv-bay digital magazine
Article Copyright tv-bay limited. All trademarks recognised.
Reproduction of the content strictly prohibited without written consent.

Related Interviews
  • Azule Finance at BVE 2016

    Azule Finance at BVE 2016

  • Five Arrows Media Finance at IBC 2015

    Five Arrows Media Finance at IBC 2015

  • Azule Finance at BVE 2013

    Azule Finance at BVE 2013

  • Kit Financing with Medialease at NAB 2017

    Kit Financing with Medialease at NAB 2017

  • Pilat Media on BroadcastShow LIVE at IBC 2013

    Pilat Media on BroadcastShow LIVE at IBC 2013


Related Shows
  • Paragon Bank Technology Finance at BVE 2016

    Paragon Bank Technology Finance at BVE 2016


Articles
How Broadcasts Can Simplify The Delivery Of Live Video Streams To Affiliates
Phillipe Gonon In today’s fast paced environment broadcasters need to quickly, easily, and simultaneously share high-quality live content with multiple affiliates or other broadcast facilities. However, today it’s typical for each third-party transmitter to be connected to its own receiver with its own platform and management system. This results in major TV channels having several web interfaces and/or screens to receive and distribute feeds coming in from third-party devices.
Tags: iss138 | aviwest | stremaing | rtmp | rtsp | rtp | hls | Phillipe Gonon
Contributing Author Phillipe Gonon Click to read or download PDF
The World of 12G 4K/UHD Processing
Varun Patel Technology moves fast and when it comes to audio and video broadcasting, there is always room for improvements in audio and video quality and ease of production. One of the main goals of broadcasters and content providers today is to create an immersive experience for the viewers, giving them the feeling of being part of the viewed content. The 4K/UHD buzz has been in the consumer world for some time but what does that actually mean for the content producer?
Tags: iss138 | lynx technik | ott | greenmachine | yellobrik | conversion | Varun Patel
Contributing Author Varun Patel Click to read or download PDF
How the Womens World Cup was Boosted by Broadcast
John Griffiths As we write this article, England’s Lionesses have just beaten Norway 3-0 and are smashing viewing figure records, with 6.9 million viewers tuning in to watch them play Cameroon on BBC One. Rewind to the previous World Cup in 2015, and England’s group and early stage knockout games tempted up to 2.5 million viewers for each match. It’s safe to say that women’s football is finally having its moment; what was perhaps once considered a niche sport is finally gaining momentum in the mainstream space with broadcasters giving it the attention it deserves.
Tags: iss138 | wwc | world cup | spicymango | diversity | John Griffiths
Contributing Author John Griffiths Click to read or download PDF
How Providers Can Win Man of the Match With Live Sports OTT
Chris Wood Times are tough for traditional broadcasters and live TV; the rise of on-demand TV and paid subscription services isn’t a secret and a large amount of the population are turning to these alternatives rather than their established counterparts.
Tags: iss138 | spicymango | ott | live sports | cdn | Chris Wood
Contributing Author Chris Wood Click to read or download PDF
State of the Nation: Wings, Fine Coffee and Fake Nudes
Dick Hobbs - new One of the many attractions of this time of year is that I get to meet with my fellow judges for the IBC Innovation Awards, and see what the industry sees as the most important, most forward-looking projects of the day. For me, this says what the key talking points are going to be in September, far more eloquently than the endless press releases from vendors which are already tumbling into my inbox.
Tags: iss138 | ibc | smpte 2110 | deepnude | cisco | Dick Hobbs - new
Contributing Author Dick Hobbs - new Click to read or download PDF