Measures and methods of valuation

By Tolley

The following Owner-Managed Businesses 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, and
  • 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 as follows:

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