Business Valuation – Where Do I Start?Written on October 2, 2026 by Kirk Rice LLP
There are many reasons why you may need to calculate the value of a business. Here we consider what those reasons might be and also some of the methods used to calculate the value.
It is important to realise that business valuation is something of an art. Furthermore, the seller will always value the business higher than the buyer, and inevitably the final value will be somewhere between the two.
Why value your business?
More often than not, the purpose of obtaining a business valuation is for sale purposes. Initially, this may be just for information purposes, whilst the business owner considers their options and exit plan.
There are other reasons for needing a valuation and other purposes include;
- On a gift or sale of shares
- On the death of a shareholder
- Transactions in connection with a Trust
- Capital Gains Tax purposes
- Company purchase of own shares
- Creation of employee share option schemes
- Shareholder disputes
- Divorce situations
Business Valuation methods
Various valuation methods have been developed over the years, and these are a useful starting point and basis for negotiation when it comes to selling a business.
Earnings multiples
This method is often used where a business has an established profitable history. A price earnings ratio (P/E ratio) is used, which represents the value of a business, divided by its profits after tax. To obtain a valuation, this ratio is then multiplied by current profits.
Careful consideration is required as to what is ‘current profits’ as it is unlikely to be simply the figure in your accounts! The accounts will be the starting point, but it is normal to adjust it for relevant factors e.g. market rate of director salaries.
The difficulty with this method is establishing an appropriate P/E ratio and these will vary widely. It is possible to identify listed companies in the same business as your own and look at their P/E ratio, but that would then need to be heavily discounted because of the lack of marketability of privately owned shares.
Discounted cashflow
Generally appropriate for cash-generating, mature, stable businesses and those with good long-term prospects, this more technical method depends heavily on the assumptions made about long-term business conditions.
Essentially, the business valuation is based on a cash flow forecast for a number of years forward plus a residual business value. The current value is then calculated using a discount rate, so that the value of the business can be established in today’s terms.
Asset based
This type of valuation is most suited to a business with a significant amount of tangible assets or property. The method does not take account of future earnings, and is based on the sum of its assets less liabilities. All assets in the accounts would need to be adjusted to market value. It will also be important to consider tax liabilities that would arise within a company should the assets be sold in the future.
If you would like more advice regarding business valuation or any other tax matter, please contact us at info@kirkrice.co.uk.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The FCA does not regulate tax and trust advice.
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