Valuation
The process of determining the economic worth of a business for sale, investment, or other purposes.
Full Definition
Valuation is the process of determining the economic worth of a business. In M&A, valuations establish the basis for price negotiations and are essential for buyers, sellers, and their advisers.
Common valuation methodologies: 1. Earnings multiple: Value = Earnings × Multiple 2. Discounted Cash Flow (DCF): Present value of future cash flows 3. Net asset value: Value of assets minus liabilities 4. Comparable transactions: Prices paid for similar businesses 5. Comparable companies: Trading multiples of listed peers
Factors affecting valuation:
- Historical financial performance
- Growth prospects
- Market position and competitive advantage
- Management team quality
- Customer concentration
- Recurring revenue
- Barriers to entry
- Sector dynamics
- Macroeconomic conditions
UK SME valuation ranges:
- Asset-based businesses: 0.5-2x net assets
- Service businesses: 0.5-1x revenue or 3-6x EBITDA
- Technology/SaaS: 2-5x revenue or 8-15x EBITDA
- Manufacturing: 3-6x EBITDA
Valuation for different purposes:
- Sale/purchase: Fair market value
- Tax (HMRC): Market value definitions vary
- Disputes: Expert determination
- Financing: Conservative/stressed scenarios
Related Terms
Multiple
A valuation ratio comparing price to a financial metric, such as revenue or EBITDA, used to value businesses.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortisation – a key profitability metric used in valuations.
Enterprise Value
The total value of a business including both equity and debt, representing the price to acquire the entire entity.
Normalised Earnings
Adjusted profit figures removing one-off, non-recurring, or owner-specific items to show sustainable profitability.