When formulating how to value a business, you essentially need to assess the financial strength of the business. To do this, the valuer will try to normalise the historic annual profitability by adjusting reported results for one off or unusual expenditure which may include an adjustment for directors’ pay (up or down) to that of an industry average.
A weighting will then be applied to the normalised results in favour of more recent years to achieve an average that might be expected from the business moving forward. If financial projections are available, these may be included on the weighting exercise although this will rank less than actual results because of the inherent uncertainty underlying projected figures.
Having assessed the ongoing profitability of the business a full review of the balance sheet will be undertaken to review for excess assets or liabilities; those items which are not necessarily required for ongoing trading which may include an adjustment for a normalised working capital assumption.
All valuation techniques involve a certain degree of subjectivity requiring estimations of costs, applicable multiples and certainty of a company’s future earnings and it is not unusual to see calculations taking into account combinations of some of the methods mentioned above to arrive at a final valuation.
As such, the resultant conclusion of any valuation report is more than likely to provide a range of values rather than a specific number.