Measures and methods of valuation

By Tolley

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Measures and methods of valuation
  • Capitalised earnings basis
  • Industry standard methods of valuation
  • Net Assets basis of valuation
  • Discounted cash flow (DCF)
  • Dividend based valuations
  • Other methods
  • Selecting valuation techniques
  • The use of earn outs

The value of a company needs to be determined for commercial reasons, for example when the owners intend to sell the company. The main valuation methods are

  • Capitalised earnings
  • Industry standard methods
  • Net assets basis
  • Discounted cashflow
  • Dividend based

These are discussed below.

Capitalised earnings basis

The capitalised earnings basis of valuation is probably the most commonly applied technique in valuing private company shares. The formula is:

Future maintainable earnings x Price/Earnings (P/E) multiple

Future maintainable earnings

Future maintainable earnings are determined broadly as follows:

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