Owner-Managed Businesses

Measures and methods of valuation

Produced by Tolley
  • 23 Jun 2022 10:25

The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Measures and methods of valuation
  • Capitalised earnings basis
  • Future maintainable earnings
  • Capitalisation rate
  • Industry standard methods of valuation
  • Net assets basis of valuation
  • Discounted cash flow (DCF)
  • Dividend-based valuations
  • Selecting valuation techniques
  • The use of earn-outs

Measures and methods of valuation

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:

  1. capitalised earnings

  2. industry standard methods

  3. net assets basis

  4. discounted cashflow, and

  5. 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 calculation is based on future estimated benefits from the company usually measured as future maintainable earnings or possibly cash flow, which are then capitalised by using an appropriate capitalisation rate for that business.

Future maintainable earnings

Future maintainable earnings are determined as follows:

  1. determine the future anticipated profits:

    1. these should be calculated based on historic audited results

    2. if results are stable then the previous period’s results should be an acceptable basis for determining sustainable profits

    3. if results have fluctuated in the past then judgement will be required to ascertain an average

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