Day 2

Focus on profit and multiple!

The most common business valuation methods apply a multiple to the ‘annual adjusted profits’ of the business. The profit in the accounts will be adjusted for ‘one-off’ costs and revenues that might have distorted the results and are unlikely to be repeated; and if the directors are taking some of their income as dividends rather than salary, you’ll need to subtract proper market salaries for them to calculate the adjusted profit.

 

Let’s say a purchaser was prepared to pay a multiple of 5 x annual adjusted profit and that your business is showing a profit in its accounts of £1m. And let’s assume there are no ‘one-off’ costs or revenues in there, distorting the results, but that there are two directors, neither of them drawing a salary – they take all their income as dividends. And let’s say that market salaries for these directors would be £50k each. The profit would be adjusted down to £900k and, applying a multiple of 5, the business might be valued at £450k; a multiple of anywhere between 3 and 12 would not be unusual depending on the business sector you’re operating in and the nature of the buyer.

 

So this is simple then – all you need to do is make more profit (and we’ll start by looking at this) and, ideally, find ways of increasing the multiple that buyers would be prepared to offer. Ironically, many of the things you’d focus on to increase profit will also have a positive impact on the multiple, too – creating a kind of double-whammy effect.