Selling your business part 2 of 3

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 or make your comments on the blog at 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

Peli Air 1507 Review
Phil Vinter Originally named after a bird that carries its precious cargo through the skies, it was, perhaps, only a matter of time before Peli released its Air range.
Tags: iss133 | peli | peli air 1507 | trekpak | Phil Vinter
Contributing Author Phil Vinter Click to read or download PDF
Fast-moving productions need multi-cam RF reliability
Darren Bilton Wireless acquisition creates a level of freedom not possible with any other form of filming yet only a decade ago the technique was barely possible. The technology enabling live real-time connections over radio frequencies has advanced leaps and bounds such that there is barely an entertainment, documentary, sports or news format today that doesn’t benefit from at least one link system. That means the demands on the kit continues to rise and includes the need for fail safe multi-camera operation, ease of use and backwards compatibility all within a small, lightweight and budget-friendly package.
Tags: iss133 | boxx tv | wireless | mpeg-4 | multicam | rf | multi-cam | Darren Bilton
Contributing Author Darren Bilton Click to read or download PDF
DJI Ronin-S Review
Tim Bearder

If you read my review of the GH5 in Issue 129 at the beginning of the year, you know I’m a filmmaker that is all about small form factor. My basic setup combines the tiny yet powerful mirrorless Panasonic GH5 with the wonderfully compact Sennheiser AVX wireless mic system. Together you’ve got a run and gun set up to die for.

Unless you actually run!

Tags: iss 133 | dji | ronin-s | gh5 | Tim Bearder
Contributing Author Tim Bearder Click to read or download PDF
The Biggest Toy Shop in the World
Emma Morrison When Nigel Woodford started his career at BBC Wood Norton in 1962, television was black and white and BBC Two had not yet been launched. In 2018 Nigel will retire, and Richmond Film Services, the pro-audio equipment rental company set up by Nigel in 1973, can count numerous contributions to iconic moments in British cultural, sporting and film history over this time.
Tags: iss133 | richmond film services | audio rental | auction | liquidity | go-dove | Emma Morrison
Contributing Author Emma Morrison Click to read or download PDF
Perimeter LED screens management
Nicolas Houel Opened in January 2016, Parc Olympique Lyonnais, also known as Groupama Stadium, is the new home of Olympique Lyonnais football club, one of the most popular clubs in France. Since its inauguration, the stadium was a host of UEFA Euro 2016, and was also chosen to stage, among other important events, the 2018 UEFA Europa League Final and football at the 2024 Summer Olympics.
Tags: iss133 | 3dstorm | graphics | groupama stadium | liveexpert | livecg | deltacast | Nicolas Houel
Contributing Author Nicolas Houel Click to read or download PDF