Valuation e Book 2nd Edition

2023 - 2nd Edition
A comprehensive guide on how to value a business
Company Valuations:
Methods and
approaches in valuing
unquoted businesses
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A comprehensive guide on how to value a business 2023 - 2nd Edition
Disclaimer
The contents provided in this document are for guidance purposes only. By its very nature valuation
work cannot be regarded as an exact science and the conclusions arrived at in many cases will out of
necessity be subjective and dependent on the exercise of individual judgement.
The report does not constitute formal advice on what the valuation of a Company may be and it does not
reflect or imply Price Bailey’s opinion on any specific application to a particular company.
The report should be used for informative purposes only and, accordingly, should not be relied upon for
any investment purposes or otherwise.
Price Bailey is not liable for any losses suffered by any party in the use of this report. Specifically, it
should not be taken as investment advice to which the Financial Services and Markets Act 2000 may
apply. The report is not for the use of, or to be relied upon by any person and, therefore, to the fullest
extent permitted by law, we do not accept or assume any responsibility to any party.
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Table of Contents
A Comprehensive Guide on How to Value a Business 2023 - 2nd edition 04
Why are we writing about this? 05
Understanding value creation - the difference between price and value 09
Enterprise Value and Equity Value 15
Adjustments 18
What is consideration? 25
Further valuation thoughts 28
Valuation methods: How UK Limited Companies are typically valued 32
Intangible Assets 50
Growth Shares 56
What type of valuation do you really need? 61
Glossary of terms 67
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A Comprehensive Guide on How to

Value a Business 2023 - 2nd Edition
Welcome to the second edition of A In this second edition, we remain committed to
Comprehensive Guide on How to Value deepening your understanding of valuation and
a Business. In this updated release, we its real-world applications. We have updated
continue our mission to provide a clear the content to reflect the evolving operational
and objective exploration of valuing and economic landscape post-pandemic, while
unquoted businesses in the UK. also providing further clarification on common
methodologies and approaches. Furthermore, in
The purpose of our first edition was to offer response to the increasing demand that we have
practical insights that took valuation beyond experienced in recent years, we have introduced
theoretical frameworks and acknowledged the two new sections: valuations of intangible assets
realities of M&A practitioners. Crafted in 2021, and valuations of growth shares.
it addressed the unique nuances of that period,
including considerations for the unprecedented
challenges posed by COVID-19 and the
influence of government relief schemes on
future valuations.
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Why are we writing

about this?
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Why are we writing about this?
Price Bailey undertake many valuations every year for a variety of purposes ranging from M&A, dispute,
investment, share options and many more.
When clients ask us for a valuation the expected output is typically a valuation letter supported by
research and workings. However, we are increasingly finding that alternative deliverables may be
preferable to clients. The purpose of the valuation and how it will be used are both essential and should
drive the output.
In addition to being expert valuers, our team also provide lead advisory support to help negotiate M&A
and funding transactions, undertake Financial Due Diligence, and provide strategic advice; we therefore
bring experience of how valuations work in practice, not just in theory. We regularly find that buyers,
sellers and interested parties are basing their valuation expectations on misleading, false or naïve
assumptions; for example, by basing expectations on poor information or because they were unaware
of certain concepts in valuation methodology and pricing. We have also seen a gap between the
‘theory’ that a valuer considers in writing their valuation report, and the reality that an M&A practitioner
lives. We have therefore created this document to help overcome these challenges for our clients. The
commentary below goes beyond the theory on valuation and also considers how these concepts are
applied in reality and when it is necessary to be in a live deal scenario to answer certain questions.
The purpose of a valuation can vary considerably. This has an impact on what type of valuation is
undertaken and what the output looks like. A series of examples of different valuation scenarios, each
with their own nuance and impact on method and/or output are below:
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The purpose: 12. There is a dispute between shareholders.
1. A client is primarily interested in knowing the 13. A minority shareholder wants to buy in or
multiples because they understand all the leave and they are challenging minority
likely adjustments to equity value. discounts.
2. A client has confused equity value and 14. There are few comparable transactions to
enterprise value and is not fully aware of the judge the ‘multiple’ from.
typical adjustments after multiplying profit or
15. A business owner is going through a divorce
revenue by a factor.
and requires a valuation.
3. A buyer’s valuation differs from a seller’s and
16. There is confusion between two parties
there is a hope that an independent valuation
on the relevance of EBIT vs EBITDA
will settle the difference.
multiples, and/or the impact of multiples for
4. Growth capital or funding round valuations comparable companies based on their prior
are getting mixed up with exit and sale year accounts.
valuations.
17. A Management Buy Out (MBO) team wish
5. Valuing a company based on the discounted to know how much a company might cost
cash flows, compared to a valuation based on to acquire but are concerned about how to
profit multiples leads to materially different finance the deal.
outcomes so expectations of buyers and
18. The owners are considering selling the
sellers become mismatched.
company to a trade purchaser but do not
6. There is perceived concentration risk around know what the right price should be.
customers, suppliers, or people.
19. The owners are considering selling to their
7. There are realistically few buyers. employees, perhaps through an Employee
Ownership Trust but do not know if the
8. The quality of financial information is poor
valuation should be the same as the price
but there is high hope of a premium value.
paid by a trade buyer.
9. A business is currently loss-making but
20. Venture Capital or Private Equity are
forecast to be very profitable in the future.
interested in investing to support growth but
10. An online valuation portal has suggested
the founders and shareholders wish to know
price expectations but someone disagrees
what the right pre-money valuation should
with it.
be and how they may be diluted over time if
11. A share options scheme needs to be the fund continues to invest equity funding to
designed and valued. support organic growth and acquisitions.
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The way a valuation should be undertaken is different in each of these scenarios; a valuation is not
always the same. As expert valuers managing the situations above and many others, we wanted to set
out what really matters when valuing a UK non-quoted company so we can help prospective clients be
better prepared for a formal valuation process and a transaction that usually and, logically, would follow.
Beyond the purpose, matters such as any valuation approach governed by the Articles of Association,
any relevant shareholders’ agreements or investment agreements and whether the whole business is
being valued or just a minority stake are all critical in valuation assignments. Once understood, company
and market-specific matters then guide the valuer.
A large proportion of the decision surrounding how best to approach a valuation and what the outcome
looks like (a letter, a report, a number, etc.) comes down to what the client is trying to achieve through
seeking a valuation – that may be addressing an issue above, or it may simply be an interest in
understanding what the business is worth.
While it sounds like an obvious starting place, the purpose of the valuation is key, as it can
lead to the valuer taking an amended process in their questioning, methodology and output.
For example, consider this scenario:

Two shareholders are starting to see the future of the business in different ways and are building up to a
disagreement. One appoints a valuer to write a valuation letter valuing the other’s holding with a view to
buying them out. The buyer then presents the potential seller with the letter.
In this scenario, it is common for the potential buyer to be firmly rebuffed and for the action to be seen as
antagonistic. The letter is often rejected on the basis that only one party instructed the valuer even if the
governing documents determine that an independent valuer should be appointed.
What is often better in this situation is to;
a) Ask a valuer to be appointed jointly and independently or,
b) Be appointed by just the buying party or selling party and ask a lead advisor to assist in
negotiating a deal.
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Understanding value
creation - the difference
between price and value
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Understanding value creation - the difference between price and value
An important distinction to be made is the difference between price and value. Often they get spoken
about interchangeably, when actually in terms of valuation and sales of a business they can be
significantly different.
Fundamentally, for all rational share transactions to take place, the buyer must see more value than the
price paid. In other words, there must be value ‘left’ for them in the pricing of the shares. A seller is trying
to minimise this gap between price and value in order to maximise their gain. In reality, this is not a zero-
sum game if good lead advisors are negotiating a smart deal, however, this concept of ‘price’ and ‘value’
does cast light onto a series of interesting valuation concepts.
For a typical ‘good’ business there are conceptually four valuation levels, as described below:
Example purchase
price range Pillar 04
Value to buyer
Pillar 03
* Seller’s
Pillar 02 Purchase price
expectations
Par value
Pillar 01
Net realisable
value
Bridging the gap - Deal structure is often critical in bridging the gap between a) par value b) the price offered and c) the sellers
*
expectations. This is where the role of a corporate finance advisor comes in to assess where your business sits relative to these
averages. Without the live context of a deal, a valuers ability to understand the maximum value to a buyer comes down to how
strategic they are in their understanding of transactions and value, their methodology, and their access to data.
Dotted box - This represents the price paid by the buyer. The purpose of a box rather than a single line is to highlight that the price
the business is sold for may be a range depending on post-completion performance.
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The four pillars of price and value
01 Net realisable value of the business’s assets and liabilities
This is the net asset value of the business. It is typically expected that a good business has goodwill (i.e.
to buy the shares will cost more than to buy the net assets) and therefore, most good companies have
value above the line.
02 The normalisation of profits
This area is where many valuations for UK limited companies reside. Enterprise Value (see below for
more details on this) in this area is typically calculated by multiplying normalised profit by an average
valuation multiple of directly comparable businesses. Sometimes revenue or another metric are used for
the multiple. In circumstances where we disagree with valuations we normally find weaknesses in:
a. the normalisations
b. the relevance of the metrics (for instance EBIT vs EBITDA is common but company structure and
sector also provide common errors)
c. the incorrect use of applying multiples (for example using multiples derived from a data set based
on prior year accounts and then applying these to a company’s forecast), and
d. the relevance of the sample.
The final point is particularly true for online valuation tools, valuations undertaken where the businesses
have poor comparability by size/sector/business model to the company being valued and where the
nature of the transaction varies (e.g. mixing a funding valuation with a sale valuation). However, one
of the most significant factors is the multiple used. The nuances of a company’s business model,
capabilities, operating environment history and forecast all combine to inform the multiple. All too often
we find the multiple being used as an average of a sample – in our view, this is rarely correct – business
owners and valuers should both understand what drives a specific company to be worth more or less
than the average. Par value is therefore a barometer of being average amongst a sample, it is rarely
the right number to set valuation expectations and a good valuer or lead advisor who understands the
business, market and transaction landscape should recognise this in their work.
03 Purchase price expectations (or the actual valuation)
This is what a seller wants to sell for and relates to their perceived value of the business. Typically a seller
for a good business believes their company is worth more than par. Buying and selling companies is not
like appointing estate agents to sell property; unquoted company valuations fluctuate during the M&A/
equity investment process due to evidenced commercial reasons not just market forces on completion.
Therefore, it is important that a seller and their advisors, fully understand the commercial rationale
for their pricing expectations and that the associated evidence and arguments are robust enough to
last several rounds of negotiations and/or scrutiny with a buyer or valuer. What really matters is the
commercial argument for the company that is being valued to be above or below par. More information
on this is covered in the concluding remarks section on the ‘Fundamental drivers of value .’
04 Value to a buyer
A buyer must see more value than the price paid. This should be down to how they expect to get value
from the target company based on their strategy, synergies, and operating model. Logically, a buyer of a
good business will be trying to justify the price on a basis as close to par value as possible. It is critical
for sellers to understand this so they can set expectations on price and deal structure sensibly. Every
business has a different value to different buyers regardless of what the price paid is and regardless
of what valuation advice may suggest. In our experience, five of the key drivers of differentials in value
between potential buyers which therefore underpin a strategic valuation with a significant premium to
par, are:
1. Operational and market synergies that expand revenue and when leveraged appropriately, can create
value greater than the sum of the two parts.
2. Skills and organisational knowledge that give an advantage to growth or costs. This may
be particularly powerful if the target company has exceptionally talented management with
commercially critical insight into key aspects of the buyer’s growth plans which can add immediate
value.
3. Differences in the buyer’s ability to utilise the target seller’s data that will enable them to achieve
better returns than other buyers through providing the seller with access to new market and revenue
opportunities or through enhancement of the buyer’s current service offering.
4. Larger scale operational and IT systems and governance capabilities that promise to drive better
monitoring and decision making for the target seller in the future.
5. A buyer’s superior access to external resources like suppliers, prices, personnel etc. that are critical
to fuelling growth in the target seller and removing existing barriers to growth which in turn improves
the growth trajectory and, ultimately, returns for the buyer.
These five factors depend on the specific buyer and seller. Therefore, when calculating the valuation for a
seller, a valuer should not necessarily presume any or all of the above factors to be consistently relevant
in determining the company’s value in most circumstances, unless a client wants to know what a highly
strategic buyer could pay. However, a lead advisor in a ‘real’ transaction should be attune to identifying
and negotiating with buyers that meet these criteria in order to maximise the deal value.
Why are the 4 valuation pillars important?
There are several reasons why these distinctions are important. Firstly, and perhaps most notably it
encourages potential buyers and sellers to consider what value they are asking for when they appoint a
valuer or lead advisor.
• Does the advisor really understand my business in depth?
• Are my expectations realistic?
• What would a rationale buyer pay?
• What a rationale buyer would pay?
• What is normal:
· In the sector regardless of the nuances of the specific company?
· For a strategic acquirer to pay?
The answer will be very different in each circumstance.
Analysing and evidencing the value to the buyer (i.e. the fourth column) is a far more strategic task than
analysing par value. There are normally few strategic buyers in any market and they are highly selective.
In a live deal scenario, if the price offered from multiple buyers is lower than the seller’s expectations and
negotiations are not bridging the gap then the owner typically has a choice to make which is normally
1) agree to sell for a lower price or, 2) decide to invest in growing profits and putting in place a plan that
grows the strategic relevance and strength of the company so as to influence multiple increases. The
latter can be informed by strategic research.
Enterprise Value
and Equity Value
Enterprise Value and Equity Value
The enterprise value of a business is its value inclusive of all stakeholders including all forms of debt and
equity, whereas equity value, as the name suggests, is the value of 100% of the shares of the business
and measures the equity value after all other claims on the business, including debt, have been deducted;
this will commonly include a normalised working capital adjustment. An example of this is below and
when cash like items exceed debt like items the equity value can be higher than the enterprise value.
Net Debt Adjustment
Normalised Working
Capital Adjustment
Equity value
Enterprise vs
Value Enterprise Value
Equity
value
Many business owners expect their company to be sold on an EBITDA multiple. This is the normalised
EBITDA number with the application of a ‘multiple’ which leads to the enterprise value. This is not the
price paid. Enterprise value and equity value numbers can be very different and are often mixed up.
Enterprise value provides a headline estimate of value based on the underlying business,
regardless of timing and the level of funding currently existing in the business and required
to fund the business on an ongoing basis
Enterprise value is therefore a useful tool which aids comparability between different businesses.
Therefore, to account for this, a buyer’s offer of enterprise value will typically be on the basis that
1. The acquisition will be on a cash-free and debt-free basis, and
2. The business will be acquired with a normal level of working capital. If the business is experiencing
a high growth phase, then it is reasonable to assume that a higher degree of working capital will be
required to fund this; in such instances use of forecasts may help to assess likely requirements.
Enterprise Value and Equity Value
The assumptions above will require adjustments to the extent there is cash (or cash-like items) and
debt (or debt-like items) in the business, and any adjustments for normalised working capital and
normalised profits in the business. Without these adjustments, enterprise value can be fairly unhelpful
as it is not necessarily reflective of what sellers are likely to receive in terms of proceeds from the sale;
the buyer will need to invest into the business in order to maintain growth.
This process of adjustment can be expressed as an enterprise value to equity value bridge, as
shown below:
Equity Value Bridge

Increase Decrease Total
40
35 32
6
30 1 27
25
20 -5
-7
15
10
0
Enterprise Add: Less: Add: Actual Less: Equity
value Cash-like Debt-like Working Normalised value
items items Capital Working
Capital
This example is explained further below.
Adjustments
Adjustments
When valuing a company on an earnings or revenue basis it is appropriate to make adjustments for any
net debt or cash in the business, subject to normal working capital levels, to arrive at an equity value.
Cash
Cash usually produces an upward adjustment to the equity value of a business, unless cash is to be
taken out of the business on completion. Either way, the valuation needs to be adjusted for cash and
cash-like items to ensure that any acquirer is not receiving a surplus of cash not factored into the
valuation, and therefore consideration paid.
Debt
Many businesses are financed in part by various forms of debt. If a business is acquired on a debt-free
basis, then any debt that is not absorbed by the buyer is deducted from the price paid.
The grey areas
There are no set rules on what are ‘cash-like’ and ‘debt-like’ items, this will vary from business to
business, and to some extent on the professional opinion of the valuer and negotiation by lead advisors.
However, some examples of items that may be considered as cash- or debt-like are highlighted below.
Cash-like Debt-like Commonly debt-like Possibly debt-like
Financial investment
Bank loans Deferred consideration Underspent CAPEX
(non-core)
Cash from exercised

Overdrafts Invoice discounting Dilapidation costs
share options
Deposits
Corporation tax Related party loans Legal claim costs
(that will be repaid)
Tax losses Finance lease and hire

Minority interests Deferred income
(if recoverable) purchase obligations
Adjustments
For example:
An offer is made on the basis of ‘8 x normalised EBITDA on a debt-free, cash-free basis, subject to
normalise working capital.’
Though overly simplistic, this would be akin to a typical way for a buyer to phrase valuing a target
company. It is logical to therefore expect, after agreeing on the headline enterprise value (i.e. 8x
normalised EBITDA), for there to be significant negotiations around what is debt-like and cash-like.
Valuers must also focus on these concepts in order to derive the likely market value of the shares (i.e.
equity value).
These adjustments can have a marked impact on the valuation and can vary significantly depending
on who is doing the valuation, who they are acting for (buyer/seller), and the purpose. This is important
because the assumptions made in the treatment of debt-like and cash-like items should be documented
so that anyone scrutinising the valuation can understand the reasoning behind their treatment. Secondly,
these nuances and adjustments are something that an automated system will certainly not pick up on
and therefore, for most valuation purposes, automatically generated valuations are not reflective of the
output from valuation methodologies in the ‘real world’. Instead, they provide headline, enterprise value-
based proxies.
Normalised profits
Normalised profit is the most widely used metric alongside a multiple (derived from comparable deals) in
order to determine the enterprise value for UK unquoted companies. Generally, both a buyer and a valuer
will focus on a sustainable, repeatable, measure of profit (e.g., EBIT or EBITDA). However, this is not
always the right approach and so taking expert advice is important.
The calculation itself will depend on the business.
Ultimately, what a buyer or valuer needs to be able to understand is the level of profit that they
should normally expect to achieve in the business.
Adjustments
This can include needing to account for costs that are currently artificially changing the accounts
e.g. directors’ remunerations that haven’t been taken out of the business. In practice, there is always
subjectivity which leads to movements in the profit figures. A few examples of normalisation
adjustments include:
a. Owners’ remuneration
It is common in owner-managed business for directors to take remuneration primarily by way of

dividends rather than through PAYE and as such the full market rate cost of their time is not reflected
in the wages expense shown in the profit figure; this therefore overstates the profit figure.
b. Gross margin volatility
Where the financial results indicate fluctuating margins, it is important to understand the underlying
causes of this to better assess how this may impact on the reliance placed on results across the
period under review.
c. Rent
If the business operates from privately owned premises without paying rent, then a market-rate rental
cost adjustment should be included to recognise the relationship on commercial terms.
d. Genuinely one off items
This may include furlough grants received or legal costs in relation to a dispute; both income and
expenses which are non-recurring should be adjusted for.
e. Inter-company transactions
If the company being valued is part of a group but it is being valued on a standalone basis then any
group wide support or transactions should be adjusted to be shown on an arms-length basis.
f. Personal expenses
The impact of non-business expenses which would not otherwise be expected to appear in the
business’s financials should be removed to avoid distorting business trading results.
Adjustments
Normalised working capital
When an acquirer buys the shares of a company, they do not typically expect to have to inject cash
to fund the trading requirements of the business they are acquiring. Working capital needs can vary
for businesses in growth, decline, or with seasonality. M&A lead advisors, and valuers, handle this by
appraising normalised working capital. This is the process of weighing up the historical and forecast
pattern of relevant current assets (debtors, stock, etc.) and current liabilities (e.g. trade creditors) and
forming a commercial judgement on what a normal level should be.
12 month working capital cycle
12
10
8 Average
working capital
6
Actual
4 working capital
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Average
working capital
In the illustration
Actual
above, if completion took place at a time that is below the 12 month average of ~£7m,
for example, in September, then working capital levels would be lower than normal and therefore cash
working capital
would be higher. However, the buyer would be reasonably concerned that working capital requirements
will increase, which would likely require additional cash, in the two months that followed. Unless an
adjustment was included for selling at this time, buyer and seller would both have a different attitude on
selling in September.
By normalising working capital, there should never be an unfair time to transact from a working capital
perspective. The assessment of what is ‘normal’ working capital is, once again, highly subjective but
typically calculated by considering working capital over a period of time (e.g., across a number of high
and low seasons) before an average is taken, as in the example above. However, deciding what period
to use for the average also needs to be considered, particularly in growing businesses. Lead advisors
should provide clear and honest guidance on what working capital normalisations are possible.
For the purposes of a valuation without the context of a live deal, the potential impacts of normal working
capital on share price are often something that clients want to understand.
Adjustments
Discounts
When selling less than 100% of the ordinary shares of a UK business it is possible that the value of the
shares being sold will have a discount applied to them. The company’s Articles of Association should be
carefully reviewed in case they stipulate the basis under which valuations are to occur and whether the
application of a minority discount is permitted.
A minority discount can sometimes come as a shock to sellers who expect that if the whole company is
worth £1m, their 20% holding should be worth £200,000 (i.e. proportional to their shareholding).
Minority Discounts
Shareholding being valued Low High
Less than 10% 60% 75%
Between 10% to 25% 45% 55%
Between 26% to 49% 30% 40%
50% interest 15% 25%
Majority holding in excess of 50% 5% 10%
It is also important to keep in mind that the table above should be treated as guidance [1]. For instance,
in a scenario whereby there is a 2% shareholding one may expect that the 2% interest will have minimal
value where the remaining 98% is held by one other shareholder. However, where the remaining 98%
is held by two 49% shareholders, that 2% could have strategic value, being able to break a deadlock
position between the other shareholders if needed.
Adjustments
There are many different reasons for discounts, four of these are covered below:
01 Control
The concept of an influential holding is critical. An uninfluential holding is likely to have a significant
discount. Influence can change depending on who the buyer or seller is. For example, if a transaction
moves a certain shareholder above or below a 50% or a 25% threshold then, for many businesses with
model Articles of Association, this will lead to a change of influence.
02 Concentration
Some companies have concentration risks around a few key people, customers, suppliers, events or
locations. In these circumstances, discounts reflecting the risk are common by a valuer. In a live deal
scenario, these naturally become key negotiation areas.
03 Marketability and Liquidity

Limited companies do not have a ready market to sell their shares. It can take time to find a buyer
compared to shares listed for sale on the London Stock Exchange or a small company market.
Depending on the specifics of the valuation and the data used, this can lead to a discount on account
for the time, cost, and probability of finding a buyer (liquidity discount). Some companies may struggle
to market their shares altogether due to restrictions on transfer, other shareholders’ rights, disputes, or
terms in the Articles or Shareholders’ agreements (marketability).
04 Rights of the shares

A share can give rights to voting, income and capital in different events. These three types of rights can
be varied and, as this happens, the values can shift meaning that whilst the whole is worth ‘x’, more value
can sit within one class of share than another.
What is Consideration?
What is consideration?
Most valuations are undertaken on the assumption that Consideration is paid in cash. However, it is
worth noting that Consideration, or how a business is paid for, varies both in type and timing. This
includes
• Cash paid upfront in one or more specific currencies
• Cash paid at a defined moment in time
• Cash on performance milestones, commonly known as an earn-out
• Shares or options over shares
• Debt
It is very common, especially for premium valued businesses, to have a variety of consideration types
that form what the business is sold for.
If a business is swapping its shares for shares in the buying company, it is important to understand the
value and volatility of shares to be received, the market to be able to sell them (see discounts above),
the shareholders’ agreement and Articles, any restrictions that may be placed on the shareholder, who
the other shareholders and options holders are and the dividend policy. The tax implications of receiving
consideration as shares relative to cash can be different.
Whilst a valuer might come to a figure in cash terms, the reality of consideration in a live deal may
be quite different.
What is consideration?
What is the actual price paid?
Owners often want to know ‘how much will I get paid from selling my business?’ This is almost always
different from the enterprise value and equity value and, typically, not something that a valuer can
address during their work, as valuers tend to undertake their work before a deal is live. It is, however,
something a lead advisor should be focused on during a transaction. If a typical deal starts with an offer
based on a cash-free, debt-free basis and subject to normalised working capital then, adjustments to
what the seller would actually get paid from the headline enterprise value include the following which
may impact upon how the deal is structured:
1. Debt and debt-like items
2. Cash and cash-like items
3. Normalised working capital
4. Adjustments agreed as part of the completion mechanism
5. Legal and other advisory fees
6. Taxation and potential tax reliefs available
We suggest that a valuation report and the actual price paid are understood as two separate items
linked by common heritage
For the purposes of the valuation, enterprise and equity value are very helpful. They are both useful
measures for comparative purposes and as a way to value the deal. However, they are not representative
of the actual price paid; this number is difficult to ascertain unless working on a ‘live’ transaction as a
lead advisor with a willing buyer and seller.
Further valuation
thoughts
Further valuation thoughts
01 Valuing share options
Valuing share options is a specific skill in its own right. We undertake several share options valuations
each month across the firm. Whilst many of the methods and skills overlap with those discussed in this
document, the nuances are highly specific and dependent on the company, securities issued, and the
use of approved schemes used. In some circumstances, additional valuation methods, such as the
Black Scholes method, are used.
02 Intellectual Property (IP) valuations
Valuing IP is a specialist skill. It is akin to valuing any asset (property, stock, etc.) and is separate from
valuing the shares of a business. A valuer placing a value on IP that drives performance within the
business has various routes to forming an answer, though this will often not separate out the value of
the IP from the business as a whole. A valuer of the company should focus on questions such as how
the IP could be replicated: for example, can time and money alone replicate or improve upon the IP in a
competitive environment? Does the IP create a strategic advantage that clearly generates cash flows?
Does the IP provide cash generation now or is it future-focused IP that requires further investment?
For further information, see our section on valuing intellectual property.
03 Valuations for funding purposes
We have worked on a number of transactions where the pre-money valuation is much higher than the
price at which the business could be sold. This arises because in a funding valuation there is often
significant ‘hope value’ built-in which is at risk; this is one of the key reasons why investors can access
significant tax benefits for putting capital at risk. It can cause confusion for existing shareholders,
particularly founder shareholders, as to what it means for the realisable cash value of shares.
Determining a pre-money valuation is fundamentally different to valuing a company for sale. The
comparable data used by the valuer should be funding oriented and consider the investors’ return
expectations. Normally we would look at eventual exit multiples and understand the valuation increases
that need to be achieved by funders based upon the return requirement.
Example of early-stage co-founder disagreement
Imagine the situation that a business has two co-founders holding 30% of the ordinary share capital
each and angel investors holding the balance. The co-founders fall out or the business outgrows one of
them whilst the company is still relatively early on, say, revenue-generating but loss-making and reliant
on funding. The company intends to raise £2m of additional capital at a pre-money valuation of £5m but
it is agreed that one co-founder will leave and be replaced by a new individual that the angels and other
co-founder think would be a credible management team member for new investors.
This situation, which is sadly fairly common, presents a variety of challenges including:
• The departing co-founder will often hope they can access 30% of £5m, or £1.5m of value.
• The market for investors with an appetite to buy existing shares in early-stage companies is small
as tax reliefs are minimal.
• The business is too early to see the co-founder leave, hold their shares, and therefore see only 30%
of the share capital working ‘in’ the business – in other words, the remaining doers are getting
limited capital upside.
• New and existing investors will recognise that the new additional management team member
will want shares or share options but they will likely not want to be diluted whilst there are a
significant number of shares held by the departing co-founder who is not working in the business.
This can be a very challenging situation to resolve. Depending on the terms of the Articles of Association
and the Shareholders’ Agreement, an independent valuer may determine that the sale value of a
company, without the benefit of hope value and more primary capital, is far lower than the pre-money
valuation.
Further, the fair cash value of the departing co-founder’s shares could face a significant discount for:
• marketability (due to the instability and the need to raise more primary capital to keep the
business going) and
• liquidity (as the number of investors for such shares is limited).
There are of course many counter-arguments to these points too.
Consequently, when faced with these stressful situations, it is important that clients decide if they
want an independent valuer who will undertake their work and then step back, or an advisor who
will push matters forward and navigate the subsequent challenges.
However, in principal, the exiting founder will often face significant discounts for marketability, control
and liquidity on the basis that cash paid to them is not directly supporting the company’s growth and
therefore the ‘hope value’ in the pre-money valuation does not apply.
A note on VC Backed Companies and Minority Equity

Lots of VC-backed companies have multiple rounds of equity investment. Equity is dilutive to
shareholders and where there is a high frequency of share options commonly in place this will
have additional dilutive impact.
When a business is at Series A funding stage, the current pre-money valuation on a round of
investment is an outcome of these mathematical factors and not just the first transaction or
the next transaction. Therefore it is best to look at the exit, look at comparable raises, look at
the options scheme and put all of that into a forecast capitalisation table, informed by market
data and case studies, in addition to what investors would realistically expect to have returned.
Altogether, that will help conclude today’s pre-money valuation. That number may be above or
below expected numbers but it is useful to be able to set that out when at the negotiating table, to
reduce the risk of future down rounds and ensure everyone’s expectations are (as appropriately
as possible) managed at the outset.
Valuation methods:
How UK Limited
Companies are
typically valued
Valuation methods: How UK Limited Companies are typically valued
There are six common ways in which shares in unquoted companies are typically valued. Five of
these are found in most finance textbooks or used by most advisors. The final one is a ‘common
sense’ approach that can often be overlooked. Which method is the best for a business depends on
1) the purpose of the valuation, 2) how value and growth are expected to benefit the business, and 3)
how the valuation will be used. Determining this is typically the role of an expert valuer or lead advisor.
The six methodologies are:
1. Multiples 4. Discounted Cash Flows

2. Asset Based 5. Real Options
3. Dividend Yield 6. Needs-Must
01 Multiples and comparable transactions
This is often described as an ‘earnings’ valuation. It is commonly a measure of normal, repeatable,

profit multiplied by a factor to reach an enterprise value valuation. This is the main methodology used
in the UK. In order for this methodology to work appropriately, previously discussed points in regard to
normalised profit need to be factored in, in order to ensure that the multiple is being applied to the most
relevant performance metric. Typically, EBIT or EBITDA are used, although it may be appropriate to use
another measure in the P&L (including revenue, gross profit or net profit) depending on the business. In
some sectors, more commercial or operational multiples are used.
Deriving the valuation of a company based upon a multiple of future expected revenues is particularly
applicable when valuing businesses with a significant amount of recurring revenues upon which a
consistent profit margin can be achieved.
With regard to determining the right multiple to apply to a company, there are certain things that should
be considered.
Firstly, is it representative?
Consider whether the selected deals are relevant and applicable to the business. Be particularly alert to
a wide variance of multiples, in this instance, it is not wise to just take the mean and instead a median of
the deals is likely to be more representative. Alternatively, outliers should be identified and excluded from
the sample used to generate the multiple.
A representative sample should include comparability by:
• Size – mixing multiples between large and small transactions, or, applying multiples from one size to
another is seldom reasonable without adjustments.
• Low spread – consideration should be paid to the spread of transaction multiples (using a box and
whisker chart or statistics); this provides a useful way to consider the valuation range and whether
other factors may impact the valuations within the sample.
• Sector and business model – understanding the sector, nature of the trade, and business models of
the sample is valuable for instilling confidence in a valuation multiple.
• Legal form – variances between incorporation partnerships, public limited companies, and
private limited companies exist that make comparability harder without prior consideration and
adjustments.
• Transaction timing – we normally suggest that deals should be no older than one economic
cycle, which is typically around ten years at the most, though it can be much shorter. In certain
circumstances, it may be more appropriate to focus on more recent transactions within the sample.
Secondly, were there any nuances in the deal structure that impacted the multiple?
Sometimes a headline multiple is hiding a multitude of deal nuances which allow for a substantially
different (high or low) multiple to be achieved. This is particularly prevalent in valuations for funding
purposes or minority buyout deals when mechanisms such as preference equity are used, which alter
the economic rights of the shares.
Thirdly, for both buyers and sellers, it is always important to consider economic conditions at the time
of the deal.
For example, if we take the impact of the COVID-19 pandemic, we found that in the latter part of 2021,
good businesses were selling at a premium which would likely polarise multiples, meaning that the mean
may be misleading.
Without the context on why each business was sold, who by and to whom, then the strategic value
can be missed.
Access to data is critical

All too often we find lead advisors use a multiple with no real justification other than a general sense of
‘this should be a 6x EBITDA business.’ Under challenge, with supporting data, this can be a weak way to
price a business as it takes an uninformed approach to par value (see pillar two above). Lead advisors,
and valuers, should have access to a variety of data sources to be able to set informed expectations,
negotiate effectively, and price in a strategic and data-driven manner.
Understanding time periods

It is important for valuers and lead advisors to understand the data they are looking at. Typically the
valuation data presented by corporate transaction databases will show transaction values set against the
target company’s financials from prior year filed accounts. It is obvious, but also important, to note that
these accounts are not adjusted, and nor are they the forecast that a buyer is typically more focused on.
It is important that advisors understand how to apply prior year valuation data to a business’ current and
forecast performance – a (prospective) shareholder is typically more interested in the future profitability
and cash flow of the business.
Valuing early-stage businesses

The wider application of multiples and comparable transactions can assist in valuing earlier stage
businesses, for example, through revenue multiple data or by simply providing an accurate data set of
what levels of cash similar businesses raised during venture capital or angel funding rounds, and how
much equity they issued in return. Mapping this out for founders and their investors to show the short-
term valuation position and the expected dilution in future rounds is exceptionally powerful.
Whilst maintainable earnings is a common approach to business valuations, particularly where the
business is well-established, profitable and expected to continue as a going concern, there are instances
where an alternative valuation technique may be more appropriate or to be used in conjunction with a
normalised profit basis.
A worked example of a multiples-based valuation is provided below, this incorporates Normalisation of

EBITDA and equity value adjustment.
A sample of comparable transactions is identified and used to calculate a sample EBITDA multiple.
We note that it is not always appropriate to use the average or median of the sample and a discount
or premium to the multiple may be required to reflect items such as difference in scale of operations,
competitive advantages, higher risks etc.
Comparable Company Transaction Research
Enterprise Target Target EBITDA

Target Acquirer Target Sector
Value Revenue EBITDA Multiple
Widget
Target X Acquirer A £10,000,000 £13,000,000 £1,560,000 6.41
manufacturing
Widget
Target Y Acquirer B £2,000,000 £4,600,000 £414,000 4.83
manufacturing
Widget
Target Z Acquirer C £4,500,000 £5,600,000 £616,000 7.31
manufacturing
Avg. EBITDA Multiple 6.18

Median EBITDA Multiple 6.14
The sample multiple is then incorporated into the valuation after an assessment of the company’s
normalised earnings has been considered – the company’s enterprise value is calculated as a result.
Equity adjustments are then made to calculate the equity value of the company.
Example Company - Multiples

FY21 FY22 FY23 FY24 FY25
Valuation
Year end 31 March (£ 000s) 12m 12m 12m 12m 12m
Actual Actual Draft Outturn Forecast Total
Operating Profit 231 245 272 313 322
Add back:
One-off Legal Expenses - 20 - - -
Directors’ Remuneration and Associated
12 12 12 12 12
Costs
Less:
Market Rate Directors’
(123) (123) (123) (123) (123)
Remuneration&Assosiated Costs
Normalised EBITDA 120 154 161 202 211

Weighting 1 2 3 3 3 12
120 308 482 605 633 2,148
Weighted Average Normalised EBITDA 179
Median EBITDA Multiple per

5.3
Comparable Sample
Enterprise Value 949
Equity Adjustments
Add: Cash at Bank and in hand 353
Less: Surplus Cash (253)
Less: Debt-like Items (55)
Add: Actual Working Capital 220
Less: Normalised Working Capital (200)
Equity Valuation 1,014
We note that further adjustments may need to be incorporated to reflect items such as discounts for
lack of control or restrictive share rights.
What multiple is right for my business?
The topic of multiples is subject to both exaggeration and misunderstanding within the industry.
To navigate through this, corporate acquirers, private equity firms, lending institutions (whose
agreement with a valuation is essential), venture capital funds, corporate financiers, and valuers
all rely on databases that track valuation multiples. Larger companies often benefit from
comprehensive information provided by Public Limited Companies, which is publicly available.
However, for smaller businesses, professional advisors subscribe to valuation databases, which
can be costly but offer detailed insights into company multiples. An accurate valuation must draw
from multiple databases, ensuring it does not rely on hearsay, oversimplified descriptions, or non-
professional analysis.
Indexes serve as a valuable tool for understanding the limitations of oversimplified descriptions. A
notable example illustrating the disparity between different indexes for most UK companies is the
contrast between the PCPI index and the UK200 index.
These indexes are useful to an extent, and there are times when valuers rely on them to support
broad judgements that rest on top of detailed review.
In both valuation scenarios and full or partial sale processes, sellers do not have the liberty
to arbitrarily select an index or multiple that they believe applies to their situation. They must
provide justifications for why their business strategy, capabilities, and their expected position
post-transaction will value them ahead or behind the median used. It is essential for a valuer to
comprehend the sample and be able to make meaningful comparisons, a point that business
owners sometimes overlook.
A notable limitation arises when a business heavily relies on relationships with its owner, who
now intends to sell and retire, but the second-tier management lacks the skills or connections
to independently lead the business. In such a scenario, it is highly improbable that the business
would command a median multiple from any sample or index. Contrasting this, consider the same
owner retiring, but the second-tier management, as a cohesive group, possesses the strength to
leave and join a competitor in senior leadership roles. Instead, they express interest in exploring
options with banks or private equity firms for a Management Buy Out. This second example
reflects a business that, following the completion of the transaction, is more likely to have a robust
strategy (subject to due diligence, naturally) and engaged leadership. Consequently, it is expected to
command a considerably higher multiple compared to the first example.
It is also worth remembering that when multiples are quoted they are often influenced by:
• Being a current valuation against the prior year’s profits (which may be considerably out of
date based on accounting filing timings)
• Not being normalised
• They are not reflective of the proportion of the payment that is on a performance basis
• They are not reflective of the proportion of the payment that is deferred
• They are not reflective of the proportion of the payment that is paid in shares
• In a minority deal, they are not reflective of the non-financial terms such as what happens if a
remaining shareholder leaves and how much they are paid
• They may be reflective of enterprise value or equity value
• Discount rates applied based on size and risk
All of this means individuals should be very sceptical when hearing another person talk about
multiples, and in particular when looking at an index or public information about how a business
was valued – it is almost certain to not reflect the considerations in the list above and its
application can be quite misleading. Looking at real transaction data from a valuer or due diligence
provider can help overcome the problems associated with quoted multiples.
How does Price Bailey identify comparable businesses?

Often automated tools and aggregators use SIC codes, Thompson codes, general descriptors,
and website scrapers to collate comparable transaction information – typically speaking, these
tools can be relatively ineffective at identifying relevant samples and often miss the nuances that
are pivotal to accurately valuing a business.
Our process is to use several data sources from validated sources and bring together a relevant
sample. We then consider where the company will sit in the valuation range against those
identified within the sample. This is also influenced by our judgment and experience.
It is important to understand what is being compared e.g., net profit, EBIT or EBITDA and
whether current year or prior year financials are being used is all-important in establishing
comparability.
For funding valuations, we are typically asked to appraise how valuations for similar businesses
grow over time. This often includes thinking about when the methodology may change (e.g.,
from revenue to profit multiples), providing insight into how slightly different business models
have higher/lower multiples (and why) and providing case studies of businesses that succeeded
and failed.
02 Asset based
Asset based valuations generally ascribe a value to a business based on the value of the net assets of
that business and a value is established based on the cost of reproducing or replacing the asset, less
depreciation from physical deterioration and functional and economic obsolescence, if present and
measurable.
When using this method of valuation, it is often necessary to adjust the balance sheet to take into
account the current value of assets and liabilities i.e. to reflect increases or decreases in property prices
which are not currently reflected on the company’s balance sheet.
Where the company in question holds a significant amount of fixed assets on its balance sheet which
are not deemed to be an essential requirement in generating the current level of earnings, the capital
gains tax implications arising from the possible future sale of these assets should be considered.
This method of valuation is commonly used where the company being valued either:
1. has a substantial fixed asset base; and/ or
2. does not have an established record of profits; and/or
3. is operated with the intention of generating capital growth rather than trading profits (e.g. investment
companies); and/or
4. in the event that the business is deemed to be (or is soon to be) insolvent, provided that sufficient
adjustments are made to the asset values to reflect the nature of the sale.
Alternatively, it is used when the market may value the individual assets at a higher value because they
can utilise them more efficiently than the business does in the current combination.
A worked example is shown below, which starts with the balance sheet at the most recent month end
(per management accounts or statutory accounts if the valuation date aligns with year-end). Multiple
adjustments are then made to reflect market value, non-essential levels of cash, directors’ loan accounts
and corporation tax adjustments. We note that other adjustments may be applicable.
Net Asset Valuation - Example Company
Period Ending MMMYY Balance Market Value Directors’ Loan Surplus Corporation Net Book
£’000s Sheet Value Adj. Account Adj. Cash Adj. Tax Adj. Valuation
Intangible Assets 45 - - - - 45
Freehold Properties 458 42 - - - 500

Fixed Assets
Computer Equipment 126 - - - - 126
Furniture, Fixtures and

23 - - - - 23
Fitting
Total Fixed Assets 625 42 - - - 694
Cash at Bank and in

259 - (27) (132) - 100
Hand
Stock&WIP 96 (12) - - -
Current Assets Trade Debtors 314 - - - - 314
Prepayments 27 - - - - 27
Other Debtors 15 - - - - 15
Total Current Assets 711 (12) (27) (132) - 540
Trade Creditors (160) - - - - (160)
Social Security and

(41) - - - - (41)
Other Taxes
Accrued Expenses (5) - - - - (5)
Current Liabilities Other Creditors (13) - - - - (13)
Corporation Tax
- - - - (106) (106)
Liability
Directors’ Loan
(27) - 27 - - -
Account
Bank Loan (52) - - - - (52)
Bank Loan (204) - - - - (204)

Non-current Liabilities
Provisions for
(37) - - - - (37)
Liabilities
Total Liabilities (539) - 27 - 106 (618)
Net Assets 824 30 - (132) (106) 616
03 Dividend yield
It is possible to value a company using the dividend yield method whereby the only practical benefit
of owning the shareholding in question is the right to receive dividends out of the annual profits of the
company.
It is critical to understand the achievability of the forecasted future profits and the consistency of the
dividend policy, in order to make an accurate assessment of the dividend benefit which may be received
by the shareholder.
The dividend yield basis is applicable primarily to small minority shareholdings and investments into
companies that are trusted to provide a consistent income or yield, which can broadly be considered as
shareholdings representing up to and including 25% of the issued ordinary share capital.
This recognises the fact that a minority shareholder is not in a position to direct and/or influence
the distribution of dividends or the investment of retained profits. As a result, the value of such a
shareholding is generally restricted to the right to receive dividends. However, for it to be effective, the
method requires a comprehensive dividend history that reflects the performance of the business.
There are two broad approaches to calculating dividend yield for a UK unquoted business. Though the
maths is the same, the difference relates to how sophisticated the buyer wishes to make their decision:
Option 1: short form:
1. The buyer determines their cost of capital – this is the minimum ‘return’ they would
reasonably expect, annually, for their investment based on risk, what else they could invest in,
and any costs of capital they also have. This is also known as a discount rate. Rates in UK-
based privately-held SMEs vary by investor. We commonly see discount rates between 20%
and 30% for privately owned companies, though we have regularly seen as low as 10% and
values above 50%.
2. Determine the realistic free cash flow to equity of the business that is being invested in. This
may be supported by a dividend policy.
3. Next year’s anticipated/forecast dividend payment is divided by the cost of capital determined
to establish the maximum price to be paid.
In these situations, clients often wish to have a valuer check matters such as the cost of capital,
free cash flow to equity, and the impact of dividend policies.
Option 2: long form:
To calculate valuation on a long-form dividend yield basis, the steps are as follows:
1. Identify comparable companies which have disclosed their dividends, by its very nature this is
likely to be data from public companies.
2. Ensure that these comparable companies have dividend pay-out policies that reflect the
performance of the business.
3. Calculate a dividend yield via dividend/price (which is why public company comparables are
needed).
4. Calculate an average of the peer groups dividend yield.
5. Calculate equity value for the company by: Dividend of the company / Average dividend yield
of the peer group.
04 Discounted Cash Flow (DCF)
The primary concept behind the DCF method is valuing a business on the basis of its predicted future
cash generation that has been discounted back to today’s value. The discounting is done for two
reasons, 1) to reflect the level of risk that is inherent to future performance (free cash flows) and, 2) the
time value of money – i.e. £1,000 today is worth more today than £1,000 tomorrow.
We understand DCF models in detail and therefore, use them carefully. They are rarely the model we
default to but are frequently used by us as a ‘sense check’. We are particularly cautious about using a
DCF model to value start-up companies – this is because a DCF requires predictable cash flows and
start-ups rarely have this, or, when they do, they have a higher certainty of cash outflows than certainty
of cash inflows. In these circumstances, the adjustments to handle uncertainty can lead to a certain
amount of judgment in layered assumptions that can make another valuation method more appropriate.
DCF relies on having a robust set of forecast financials for the next 1-5 years. For the purposes of DCF,
the company will need to identify its free cash flows to the firm for this period. Free cash flow to the firm
(FCFF) is the cash that is available after all short-term liabilities have been satisfied, and is calculated by:
EBIT - (operational taxes + adjustments).
With adjustments made for for:
1. Short-term investments
2. Capital expenditure
3. Depreciation
4. Other non-cash charges
5. Investments in working capital
Alternatively, the business may calculate the free cash flows to equity (FCFE), whereby free cash flow to
the firm is adjusted by:
(Interest paid - interest tax shield) + Net Debt issuance
A final ‘terminal value’ will also need to be calculated to account for all the years of potential future
earnings that an acquirer or purchaser will benefit from beyond the forecast period. A terminal value, in
simple terms, is the value of the interest in the business or project at the end of the forecast period and is
typically calculated using either an earnings multiple, the dividend discount basis or the Gordon Growth
Model (see example below). The terminal value is the most subjective element of a DCF valuation, the
Gordon Growth model is a common way to calculate the terminal value and models the cash flows of
the business (at the end of the forecast period) as a perpetuity.
Once FCFF/FCFE has been determined, a discount rate (akin to an interest rate) then needs to be applied
to these cash flows to arrive at the present value for each year’s cash flows. In simple terms, a discount
rate is a combination of how much the holders of debt and the holders of equity expect to be returned
to them within the period to compensate them for the risk they have taken in lending/investing. The
appropriate discount rates are as follows:
• For FCFF forecasts – The appropriate discount rate is the Weighted Average Cost of Capital
(WACC).
• For FCFE forecasts – The appropriate discount rate is the Cost of Equity, which reflects the
expected return of an equity investor in the business.
The appropriate discount rate is applied to each years’ cash flows on a reducing basis (to account for
the reduction of the monetary value of time) and the terminal value of the business. Added together, the
present values provide the valuation of the business. In a sale process, it will be useful to conduct the
valuation using the acquirer’s cost of capital, as that is ultimately what matters in this situation.
In a FCFF forecast, the sum of the cash flows and terminal value, reduced to their present value after
being ‘discounted’ for the effective returns to debt and equity holders, results in the enterprise value
of the business being valued. Whereas the discounted FCFE forecasts and terminal value will directly
calculate the company’s equity value.
A worked example:
Free Cash Flow to Firm (FCFF) Valuation
Weighted Average Cost of Capital (WACC) 20.00%

Terminal Growth Rate Assumption for FCFF 2.00%
Year 1 2 3 4 5
Net Income £500,000 £540,000 £583,200 £629,856 £680,244
Add: Non-cash Charges £50,000 £50,000 £50,000 £50,000 £50,000
Less: Investment in Working Capital £10,000 £10,000 £10,000 £10,000 £10,000
Less: Fixed Capital Investment £10,000 £10,000 £10,000 £10,000 £10,000
Add: Interest x (1 - Tax Rate) £25,000 £25,000 £25,000 £25,000 £25,000
FCFF £555,000 £595,000 £638,200 £684,856 £735,244
Present Value Factor £0.8333 0.6944 0.5787 0.4823 0.4019

Present Value of FCFF £462,500 £413,194 £369,329 £330,274 £295,478
Sum of PV of Forecasted FCFF £1,870,775
Terminal Value (ViaGordon Growth Model) £74,995

Present Value of Terminal Value £30,139
Enterprise Value £1,900,914

Add: Cash-like systems £250,000
Less: Debt-like items £830,000
Less: Preferred Equity £0
Equity Value £1,320,914
DCF methods are complex and vary in nature. The example above is a highly simplistic example. The
method has its critics as it can be too academic an approach but affords the valuer a great deal of
flexibility as various scenarios can be considered. At the very least, a DCF valuation can provide a
valuable sense check to use alongside other methodologies.
Nonetheless, there are times when we query its application, for example, when the period cash flows
are all negative and the terminal value is positive, then we sometimes find that excessive analysis is
undertaken on the loss-making period and the wedge of cash at the end that makes the whole project
rational is under-evaluated. Further, there are times when conflating income (cash flows) with capital
value is unwise.
05 Real options approach
This methodology applies to strategic deals. It appraises the cost of doing vs not doing something.
For example, if a target company is genuinely strategic due to its access to matters such as market,
intellectual property, or relationships, then the cost of not buying it may far outweigh the cost of buying it.
This valuation method only applies to a small number of UK limited companies. It is far more common
to see the method used for large company acquisitions and monopolistic commercial rights in markets
with high barriers to entry, such as TV networks bidding for premium sports or film distribution rights.
From an M&A and company valuation perspective for genuinely strategic transactions, this method
is very interesting for a valuer but also challenging to access data for. The method normally brings
significant pressure and carries significant risk.
Strategically thinking about the things a company could or could not do, or that the competition
is likely or not likely to do, and being able to generate some idea of how any of these occurrences
would impact performance and overall value, is incredibly important.
In our experience as advisors, many businesses want to be valued as a strategic sale and it can be
enriching for businesses to understand what they need to do in order to access this type of rare and
premium valuation method.
06 Needs-must
The final methodology is not a valuation method that would commonly go into a report, but it is worth
listing as it is often simply the reality of the situation. This method is about a seller’s belief in pillar three
or the vendor’s price expectations. Sometimes, a seller simply will not sell for lower than a certain price.
That may be a seller who doesn’t need to sell and, regardless of the value of the company, their price is
set, or a founder who is not willing to sell below a certain pre-money valuation regardless of the bridging
tools used.
We call this a ‘needs must’ valuation because that is what the need must lead to, otherwise the seller will
reject an offer. Arguably, this is not a valuation method, it is a walk-away price.
However, in our experience most valuation method literature is highly academic and does not
recognise that small and medium-sized business owners have choices; they can call the shots if they
firmly believe in a walk-away price.
A valuer may reach a higher or lower number and should not be influenced by the seller’s needs-must
number if they are told it.
However, equally, a valuer must respect that the outcome of their logical, data-driven and rational work
will also need to sit alongside some client’s intuition and belief regarding the price they will sell at.
For some, this belief is more powerful than any letter or report and so we include this as a sixth method.
Another way of looking at this valuation concept is from the buyer’s perspective - or the fourth pillar. A
Private Equity buyer, for example, may say, ‘I simply must get 3x the cash I put into this business within
five to seven years of my investment.’ In this circumstance, the pricing of the business they are acquiring,
the business plan for growth, the probability of success, and the market they sell the shares to later all
must combine to provide for their need. A seller and their advisors must be attuned to this and negotiate
a deal to bridge this need. This understanding is critical to getting deals agreed.
Intangible Assets
Intangible Assets
In the discussion above, we have focused on the valuation of the entirety of a privately-owned business.
However, another type of valuation that is growing in popularity is that of intangible assets. Intangible
assets are becoming an increasingly important part of many businesses as the economy relies
increasingly on technology and data; therefore the need to understand an intangible asset’s value to
the business is paramount. Accounting standards are also developing to better incorporate the value of
intangible assets onto the balance sheet, reflecting the value generation they provide.
Intangible assets refer to assets that lack a physical presence, but hold significant value for businesses.
They are the non-monetary resources and rights that contribute to a company’s competitive advantage,
market position, and overall value. Unlike tangible assets such as buildings or equipment that can be
seen or touched, intangible assets can seem more abstract and include intellectual property (IP), brand
recognition, patents, copyrights, trademarks, proprietary technology, customer relationships, software,
licenses, and goodwill.
Intangible assets can exist in the form of ideas, knowledge, or legal rights. Despite their intangibility,
this class of assets can be critical drivers of innovation, future growth potential and ultimate business
success. Creating unique advantages, such as market disruption and barriers to entry for competitors,
customer loyalty, and the ability to differentiate products or services.
Intangible Assets
Valuing intangible assets, however, poses a complex challenge as their worth often lies in their potential
to generate future economic benefit, rather than their present market value. Nevertheless, recognising
and properly accounting for these intangibles is essential for accurately assessing a company’s overall
value, facilitating informed decision-making, attracting investment, and understanding the true potential
of a business in a knowledge-driven economy.
Broadly speaking, there are three approaches to the valuation of intangible assets and intellectual
property:
1. Replacement cost approach – The valuer will consider the cost required to replace or reproduce the
intangible asset and use this as a benchmark for the value of the asset. It should be noted that whilst
this approach is relatively simple, it ignores the market impact (and cash/profit generating abilities) of
the asset. This method is frequently used for valuations of software, technology, and licences.
2. Income-based approach – A collection of approaches based around Discount Cash Flow

methodologies, which considers the asset’s ability to generate an economic benefit for the business.
Relief from Royalty
One such approach is the Relief from Royalty method, which assumes the cash flows that the
business might generate if it were to hypothetically licence the intellectual property to a third party
and collected royalty payments for its use. The Relief from Royalty method is commonly adopted for
trademarks, designs, and brands.
A worked example is shown below using the following steps:
1. Forecast the revenue that the company generates as a result of owning the IP
2. Calculate the expected royalties received – an assumed royalty rate may be sought from
database providers or publicly available information
3. Calculate post-tax royalties received
4. Calculate the present value of the post-tax royalties
5. Calculate the terminal value using the Gordon Growth model (as discussed on page 24and
discount the terminal value to present value
6. Add the present values of the post-tax royalties and terminal value
Intangible Assets
Valuation Date 31-Dec-2023

Discount Rate 21.00%
Perpetual Growth Rate 3.00%
Royalty Rate 3.50%
Corporation Tax Rate 25.00%
Multi-period Excess Earning

F’cast F’cast F’cast F’cast F’cast
Valuation
Year end 31 Dec (£) Dec 24 Dec 25 Dec 26 Dec 27 Dec 28
Revenue (assumed all revenue attributable
3,000,000 3,330,000 3,596,400 3,704,292 3,815,421
to IP)
Pre-tax Royalties Received 105,000 116,550 125,874 129,650 133,540
Corporation Tax (26,250) (29,138) (31,469) (32,413) (100,155)
Post-tax Royalties Received 78,750 87,413 94,406 97,238 100,155
No. of Periods to Discount 1.00 2.00 3.00 4.00 5.00

Present Value Factor 0.83 0.68 0.56 0.47 0.39
Present Value of Post-tax Royalties 65,083 59,704 53,289 45,362 38,614
Terminal Value (per Gordon Growth

220,958
Model)
Present Value of Terminal Value 85,189

Sum of Present Value of
262,052
Post-tax Royalties
Relief From Royalty Valuation 347,241
Intangible Assets
Multi-period excess earnings
In a Multi-period excess earnings approach, the valuation is conducted on the basis of considering
the earnings which can be attributed to the intangibles asset by projecting the business’ cash flows
and deducting the contribution made by other assets to the business’ revenue. This approach is
typically used in the valuation of technology, customer relationships and licences.
A worked example is provided below, which covers the valuation of existing customer relationships
– the premise of this valuation is to understand the value derived from those existing customers
(adjusting to remove any income or costs associated with new customers). The profits are then
adjusted for charges that may be related to other assets that might contribute to such income.
1. Forecast EBIT generated from the intangible asset being valued (in this case the EBIT generated
from existing customers after churn has been accounted for)
2. Deduct Asset Charges related to other intangible assets using an appropriate rate
3. Adjust for corporation tax and interest
4. Deduct other contributory asset charges in generating the forecast Net Profit, examples include
charges over working capital, tangible asset and human capital to calculate the excess earnings.
Other contributory assets are assumed to be nil in our example as no additional investment is
required to service the existing customer base (and no additional investment is assumed)
5. Discount the Excess Earnings to present value over the expected lifespan of the asset
Intangible Assets
Valuation Date 31-Dec-2023 Brand Asset Charge 1.00%

(as % of post-churt revenue)
Discount Rate 21.00%
Systems Asset Change 4.00%
(as % of post-churt revenue)
Сhurn rate 20.00%
Corporation Tax Rate 25.00%
EBIT Margin 23.00%
Multi-period Excess Earning Valuation F’cast F’cast F’cast F’cast F’cast

Year end 31 Dec (£) Dec 24 Dec 25 Dec 26 Dec 27 Dec 28
Revenue from Existing Customers b/f 3,000,000 2,400,000 1,920,000 1,536,000 1,228,800
Customer Churn (600,000) (480,000) (384,000) (307,200) (245,760)
Post-churn Revenue 2,400,000 1,920,000 1,536,000 1,228,800 983,040
EBIT 552,000 441,000 353,280 282,624 226,099

Add back: Costs Incurred in Relation to
20,000 20,600 21,218 21,855 22,510
New Customers
Interest Charge - - - - -
Brand Asset Charge 24,000 19,200 15,360 12,288 9,830
Systems Asset Charge 96,000 76,800 61,440 49,152 39,322
Corporation Tax 108,000 86,400 69,120 55,296 44,237
Net Profit 344,000 279,800 228,578 187,743 155,221
Other Contributary Charges - - - - -

Excess Earnings 344,000 279,800 228,578 187,743 155,221
No. of Periods to Discount 1.00 2.00 3.00 4.00 5.00

Present Value Factor 0.83 0.68 0.56 0.47 0.39
Present Value of Excess Earnings 284,298 191,107 129,026 87,583 59,844

Multi-period Excess Earnings Valuation 751,859 Assumes customer life span is five years
3. Market-based approach – Akin to the multiples method, the valuer will use valuation data from
disclosed transactions of various similar intangible assets to derive a valuation for the asset in
question. In practice, this is used predominantly in domain valuations.
Growth share
valuations
Growth share valuations
Growth shares are a great way for a business to motivate senior management by offering them a share
in the company’s value above a certain threshold. They are typically used by private limited companies,
and particularly high potential, early stage companies with high growth expectations. Growth shares
have specific economic rights tied to them, meaning the shareholder only benefits if the company’s value
exceeds the predetermined hurdle – therefore, they are designed to incentivise growth shareholders to
drive performance in the business and create capital value growth, in order to benefit from the uplift.
Unlike other incentive schemes like EMI options, growth shares are issued to employees right away
without any limitations. They are especially useful in the event that traditional options schemes, such
as EMI, are not available to the business. However, they can also be used alongside EMI options,
unapproved options schemes, nil-paid shares and Ordinary share issues – with the relevant share
scheme chosen dependent on the commercial and tax circumstances of the Company and the
individual.
For more information on what growth shares are and whether they may be an option for your business,
read our introductory article on valuing growth shares.
The concept of valuing growth shares is rooted in their ability to provide the holder with value at some
point in the future, as a result, a growth share will have non-zero value even if the valuation of the
company is below the hurdle value.
The first step in valuing growth shares is to understand the particular rights attributable to that particular
share class and how it interacts with other share classes within the capitalisation table. The key items
that need to be understood are:
1. The hurdle value
2. How proceeds are distributed among all shareholders in the event the business is sold
3. The expected rights attributed to the growth shares
All of these will also need to be taken in the context of the specific business and all the factors that are
unique to the industry and current economic environment.
The Articles of Association and Shareholders’ Agreement will form the basis for understanding the rights
given to the Growth Shares and will serve as the main point of reference. The following sections are
critical:
1. Share Capital and Rights Attached to Shares – This provides a high-level view of the different
classes of share utilised by the company.
2. Return of Capital and Exit Provisions – This sets out the order in which consideration [and link back
to the consideration section early] is received in the event of the owner managers and shareholders
of the business deciding to exit (a liquidity event).
3. Dividend Rights – Growth shares are typically designed to restrict the holders right to receive a
dividend completely or until particular criteria are satisfied. A right to receive a dividend will increase
the value attributable to the growth share.
4. Voting Rights – Growth shares typically do not have voting rights attributable to them
(or have restrictions placed upon their rights to vote). A right to vote will increase the value of the
growth share.
5. Transfer of Shares – Given the restrictions placed upon growth shares, there often isn’t a market
for such shares (particularly those in private companies). However, if in the event a buyer is found,
the transfer may be subject to 1) the approval of other shareholders, 2) that the offer is first made to
existing shareholders or 3) that a formal valuation (or particular process) must be followed.
6. Leaver Provisions – Growth shares are often used as a tool to incentivise key individuals in a
business and they may forfeit their growth shares, or sell at a substantially reduced value in the event
that they (or the company) terminates their employment.
7. Drag and Tag Rights – Whilst they typically do not have a direct effect on the value of the growth
shares, it is often worth considering whether a particular shareholder (or group of shareholders) can
effect an exit and, if so, on what terms. Such rights, particularly those that enable other shareholders
to drag their fellow shareholders into a sale, can inadvertently alter the proceeds received by the
holder of the growth share – though this will often be context specific.
There are a number of methods for calculating valuations for growth shares. The Black-Scholes model
is the most common and popular mechanism used. However, alternatives relating to Discounted Cash
Flow and Hybrids also exist.
Black-Scholes model
The Black-Scholes valuation model, originally used for valuing call options over the shares of publicly
listed companies, is now commonly applied to determine the value of growth shares. This is because
both mechanisms share similarities: if the share price doesn’t reach the strike price, there is no payoff,
but if it surpasses the strike price, the payoff increases. However, adjustments to the output of the
Black Scholes model (or the inputs) may need to be made to reflect the rights attributable to the growth
shares.
The model utilises a number of key inputs to derive the value of the growth share, these are: the current
valuation, the valuation hurdle (at which shares begin accruing value), the risk-free rate (typically
estimated using the yields of mid-term government issued bonds, the expected exit date, an estimate of
the volatility in the company’s valuation, and dividend yield (if applicable)).
As mentioned above, the Black Scholes model was originally developed to value call options and so a
number of adaptations and estimations need to be made to apply the model to growth shares in private
limited companies.
As a result, there is often some hesitancy for individuals to use the Black-Scholes model for valuing
growth shares, as well as the following:
• The model may appear confusing, with inputs that are difficult to obtain/estimate and mathematical
workings (and supporting theory) that are unfamiliar.
• Confusion arises regarding models that include or exclude dividends.
• Difficulty in understanding how a business’s growth plans relate to the inputs.
• Uncertainty about acceptable inputs for the valuation.
• Lack of knowledge regarding the acceptability of the valuation output.
The crucial step for a valuer using the Black-Scholes method is to ensure they understand how the
planned growth choices align with commercially justifiable inputs. Doing this may involve the need
to adapt the formula or the structure of the inputs within the model to arrive at a suitable answer.
For instance, volatility is a crucial input that can be poorly assessed due to the difficulties inherent
in assessing the volatility of the share price of a privately-held company, given the lack of a readily
accessible market for the shares in that company. Additionally, using the volatility of comparable public
companies may not adequately reflect the risk of the privately-held company, particularly the liquidity and
operational risks of such companies. This can lead to inaccurate or commercially questionable valuation
results. Limited understanding of different growth scenarios and their interrelationships can expose
shareholders and companies to unforeseen challenges.
To effectively use the Black-Scholes method, a valuer must:
• Understand the growth plan and its key drivers.
• Comprehend the reasoning and evidence behind the projected performance increases.
• Identify challenges to the plan and learn from past mistakes of similar businesses.
• Consider alternative growth scenarios if challenges materialise.
• Evaluate the true risk factor to growth by considering all the information.
Challenges from HMRC
Growth share have increased in popularity over the last couple years, driven notably by the need for small
businesses to provide incentive schemes to key stakeholders (typically management or key employees)
but their particular circumstances prevent them from utilising traditional tax-advantaged incentive
schemes (such as EMI options).
The increased popularity of growth shares has gathered additional scrutiny from HMRC. Historically it
had been argued that growth shares issued with a hurdle price below the current share price would have
low (or even nil) value – HMRC have taken the stance that whilst those shares may not currently grant
the holder any benefit (if a liquidity event where to occur tomorrow), they are issued are on the premise
that the company will grow in value, and the growth shareholder will generate a gain as a result.
We have advised our clients to incorporate substantial ‘daylight’ between the current value and the hurdle
value when designing growth share schemes to avoid such scrutiny. Further, we would advise our clients
to instruct an advisor to value the growth shares upon issuance, using a credible valuation methodology
(such as an adjusted Black Scholes model).
What type of valuation

do you really need?
What type of valuation do you really need?
The answer lies in what it is that the company is trying to achieve and the specific context of the
valuation. In the majority of cases, we are asked by clients to produce a valuation letter and workbook.
However, as the previous commentary highlights, even this has significant breadth in how a valuer may
reach their conclusion.
• Do you want to know how much someone would pay for the shares for all or part of your business?
In this case, a traditional valuation letter is likely to be most appropriate.
• Do you need an independent valuer to resolve a formal matter, such as the need to appoint a
formal valuer? A valuation report and accompanying workings is likely to be most appropriate.
• Do you want to know the enterprise value or the equity value? Most clients want to know the equity
value and this involves going into sufficient detail to understand the company to the extent that
the shares can be valued. However, sometimes clients are happy just understanding an enterprise
value range as they already understand all of the likely adjustments from enterprise value to equity
value and do not need third party validation. In this situation, we have specific report formats that
are more engaging, commercial and useful than a normal valuation letter.
• At an even simpler level, do you just want to know what the ‘real’ multiples in your sector have
been recently? Again, in these circumstances we have specific report formats that highlight
multiples in your sector and adjacent sectors to highlight the capital value differences of similar
business models in similar spaces.
• Are you an early stage or high growth business wanting to know how to set your pre-money
valuation? We suggest that you engage a valuer to use comparable data to evaluate similar
businesses and go further by highlighting to investors what future dilution or follow-on funding
may look like and what the data-informed exit value, and thus fully diluted returns, could be as
a range. Asking the valuer for only the pre-money valuation is rarely that useful for investment
oriented transactions. We have a specialist team focused on these types of valuations.
• Is a dispute bubbling and are you trying to value another shareholder’s holding in order to
purchase it at fair value? In these circumstances we would encourage you to engage us as lead
advisors rather than valuers; it is rare that a third party will read a valuer’s letter and simply accept
the outcome unless they are bound to it by the Company’s constitutional documents.
• Do you need forensic accountants or an expert witness valuation? In these circumstances, a ‘full’
valuation report that goes into significant detail is likely to be needed. We have a specialist team
focused on these types of valuations.
• Do you need to value a company that you are trying to acquire? In these circumstances, a variety
of outputs can be relevant and it may be more appropriate to engage professionals as lead
advisors rather than valuers.
Ensure that you are clear on the purpose of the valuation
One of the key things to be clearly communicated to the advisor responsible for producing the valuation
is the purpose of the valuation. Why does the business need one at this point in time? What is its
intended use? And who is it for? The purpose of a valuation can have a considerable bearing on the
treatment of the inputs, the best methodology to use, and, ultimately, the value reached.
For example:
• Divorce valuations may be different based on consideration type and settlement timing
• Funding valuations are rarely relevant for M&A
• Options schemes can have very different valuations
• Valuations of minority holdings consider the power balance of who is in place now and in different
scenarios later
A valuer’s expertise and knowledge can only come to fruition in calculating the optimal value possible
for a business if they have all the true and correct information available to them – therefore, it is in
everyone’s interest to both know the purpose and to be honest about it.
Do you need a valuer or negotiator?

Often the circumstance under which a valuation is requested is far more complex than what
can be fully documented in a valuation letter. Instead, before a final opinion can be reached and
reported, all parties need to enter into discussions regarding synergies, value drivers, and non-
negotiables, among other things.
A common example of this is when business owners have a good grasp of the nuances
surrounding enterprise and equity value, have a good idea of the multiples and are just interested
in the synergy value with prospective buyers. Another is in circumstances when we are asked to
provide a valuation for a growing or bubbling dispute, and it is not at the request of a court or an
arbitrator so the other side is not compelled to take on our views. Often in these circumstances,
what the client needs is a negotiator. We will still need to do the work of a valuation e.g.,
researching the market and understanding how to determine the valuation, but the reality is that
producing a formal letter can be antagonistic and may do more harm than good in finding a
mutually agreeable solution. In those circumstances, a conversation is needed instead.
The Price Bailey team provide both – our expert valuers are also strategy and corporate
finance advisors, with a wealth of skills and experience in transaction negotiations.
Closing remarks:
Fundamental drivers of value
The fundamental truth behind all valuation methods is appraising the relationship between growth, cash
generation and the current position (i.e. the balance sheet). This tripartite relationship is what a valuer is
trying to ascertain.
The human choices that go into these three elements, such as the business plan, marketing, supply
chain, quality of the team, strength of customer relations, governance and systems, and business plans
are all important, but ultimately at the point of valuation, they get reduced down to these three key areas.
Measures of profit are a short-hand route to valuation (i.e. to enterprise value), but for UK limited
companies, the long-hand requires adjustments for cash generation and balance sheet items. This
is because the capital required to generate certain cash flows now and in the future is important
in appraising value. Whilst this is an oversimplification, it is fundamental to value and pricing that
comparable companies that generate greater cash flows using less capital (debt, equity and retained
profit) than their peers should have premium equity values, no matter which valuation method is used as
they simply provide the owner a stronger return on equity, with less risk and greater distributions.
From a purely financial perspective, therefore, a scalable business is one that, in the mid-run, grows
distributable cash flows quickly and consistently whilst requiring modest working capital growth and
limited debt and equity investment. Business owners seeking value growth should therefore focus on
strategic levers in their growth strategy that drive such performance.
All of this should mean that a seller questions if they really do need to sell or not, and a buyer, particularly
one using leverage to acquire, really wants to acquire the shares in the specific company given its
strategic advances in cash generation. From a lead advisory perspective, valuations in a competitive
environment naturally increase in this situation. However, the onus is on business leaders to optimise
their growth strategy for value creation.
Key choices
Bringing everything together, there are some key choices for business owners who are looking to instruct
a valuer to make. These are set out in the diagram below.
It is valuable for potential clients of valuation services to think through what they are expecting from
these choices, and why.
Purpose
Equity value vs. Data Price vs. Valuing 100% vs. Growth vs.
enterprise value sources value valuing minority exit valuation
Methods
Independent valuer vs. negotiator Letter vs.report
Valuation
Our team are, of course, always on hand to assist and guide clients on making these choices to get to the
right commercial and personal outcomes for business owners and their families.
Glossary of terms
Articles of Association – Articles of Association are a regulatory document that, along with a
Memorandum of Association, form the company’s constitution. These articles serve as the governing
framework, outlining the legal obligations for the organisation’s structure, directorial responsibilities,
shareholder rights, and the proper mechanisms for overseeing company decisions and operations.
Bank loans – an amount of money that is lent to a borrower (individual or company) for a certain period
of time, typically with interest, securities and set repayment terms.
Capital expenditure (CAPEX) – CAPEX refers to the funds a company invests in current and/or new
tangible assets (such as technology, equipment, machinery, and property) that are recorded on its
balance sheet, in order to maintain or grow the business.
Cash – in accounting terms, cash refers to money that is readily available for use. Cash can include all
currency, coins and deposits in the bank that are owned by the company. Cash can also include ‘cash-
like’ items, such as rent deposits or certain fixed assets that could be readily sold.
Debt – refers to the amount owed by a company for funds borrowed and both short-term and long-term
liabilities. Debt can include overdrafts, bank loans, asset finance and other financial instruments. Debt
can also include ‘debt-like’ items, such as outstanding corporate income tax payable, accrued interest
and lease obligations.
Deferred consideration – consideration for the sale of a company or asset that is, or expected to
be, payable at some point in the future and after the date of completion of the transaction. There a
numerous reasons why deferred consideration may feature as part of the consideration on a deal,
and the terms and rights attributed to the deferred consideration can vary significantly too, which can
lead to increased obligations on the part of either the buyer or the seller (such as interest payable on
any deferred consideration for the buyer, or performance hurdles that trigger the payment of deferred
consideration for the seller).
Deferred income – deferred income is money received for goods or services which has not yet
been earned.
Dilapidation costs – costs incurred for not maintaining a company property to a suitable standard
before ownership of the property is transferred from the seller. Typically this is covered by a deposit held
by the landlord, so no additional expense should ordinarily be incurred.
Glossary of terms
EBIT – EBIT stands for earnings before interest and taxes. It is a measure of profitability that represents
net profit with any interest and taxes added back to them. It can be calculated by taking the profit before
tax figure from the profit and loss statement, and adding back any interest charges.
EBITDA – EBITDA stands for earnings before interest, taxes, depreciation and amortisation. EBITDA is
also a measure of profitability and is the calculated the same way as EBIT, but with the additional add
backs of both depreciation and amortisation charges.
Employee Ownership Trust – an Employee Ownership Trust (EOT) is a common, tax-efficient example
of employee ownership in the UK. In establishing an EOT, the employees of a company, as a collective,
become the majority owner of the business and are involved in key decision-making for the business. An
EOT is an increasingly popular way for current owners to retire from or sell their business.
Enterprise value - the enterprise value of a business is its value inclusive of all stakeholders including all
forms of short-term and long-term debt and all equity, cash and cash equivalents.
Equity value - equity value is the value of 100% of the shares of the business and measures the equity
value once all other claims on the business, including debt, have been deducted.
Financial Due Diligence – financial due diligence (FDD) is an investigation into the financial health of a
company, usually undertaken by professional advisors on behalf of a corporate buyer or investor as part
of an acquisition of, or investment into, a corporate entity. FDD involves a thorough review and analysis
of the target company’s: historic financial performance, accounting policies and estimates, employees
and management personnel information, forecasted performance, tax liabilities, and other applicable
financial information provided by the target company’s management team.
Finance lease – a finance lease is a type of debt where money is lent against an asset (such as property,
equipment, machinery or stock). Legal ownership of the asset is with the company providing finance
until the point at which the finance has been repaid in full. Other finance lease agreements, such as in
the case of hire purchase agreements, finance is lent for the duration of the assets life and, therefore, the
borrower never has economic ownership of the asset.
Growth Shares – growth shares are a special class of shares that, in contrast to EMI options or other
option based incentive schemes, are subscribed for immediately. They typically have specific economic
rights attached to them that means that, in the event of sale, the shareholder only benefits if the value of
the company exceeds the predetermined hurdle.
Glossary of terms
Intellectual property - Intellectual Property (IP) is the collective name for intangible creations of the
mind, including inventions, artistic and literary works, designs, and identifying elements used in the
course of a business’s goods or services. Safeguarded through legal means such as patents, copyright,
and trademarks, the IP system fosters an environment conducive to creativity and innovation. IP can
manifest in various forms such as brands, inventions, software, designs, music, literature, art, and more.
Invoice discounting – invoice discounting is a form of debt borrowing where a lender will supply the
business with finance against the value of the debtor book. When an invoice is raised and sent to a
customer, a percentage of the total of the invoice is lent to you by the lender and repaid when the invoice
is settled. It enables businesses to benefit from a release of cash that is otherwise tied up in outstanding
invoices.
Lead advisor – a lead advisor in corporate finance is a qualified professional who utilises the breadth of
their established industry knowledge and experience to advise on all areas of corporate finance, M&A
and related transactions, and transaction services.
Management Buy Out (MBO) – a management buy out (MBO) is a form of company sale or exit
where the exiting shareholders transfer majority ownership of the company to its existing directors or
managers.
Minority interests – the value of the shareholding of a business or individual who owns less than 50% of
the shares of the business.
Net realisable value – refers to the value of an asset in terms of the amount it would be expected to
attract when sold, minus any incurred selling costs.
Overdrafts – an overdraft is a temporary loan. It is an agreed amount of money that a bank/ lender is
happy to allow the account holder to withdraw over and above their available cash in the bank, which can
support with cash flow issues if needing to pay suppliers ahead of receiving payment from debtors. An
overdraft will typically have a threshold after which the account holder will be charged interest for making
use of the facility. Lenders can also request immediate repayment of an outstanding overdraft amount,
which can cause issues if the business/individual does not have available funds elsewhere to do so.
Par value – par value (also known as nominal value) of shares is the original cost of the shares that a
company assigns at the point they are first issued and the lowest legal price at which a company would
sell its shares. It can only be changed with shareholder approval and (for private limited companies
limited by shares) is detailed in a company’s Articles of Association.
Glossary of terms
Pre-money valuation – the value of the total share capital in a business (number of shares x market
value price per share) before it receives external investment.
Private Equity – private equity is a medium to long-term source of finance that is provided in return for
an equity stake of high growth private (i.e. unquoted) businesses.
Related party loans – related party loans are a type of loan between a company and a person (individual
or entity) who is connected to the company, this can include directors’ loans, shareholder loans,
subsidiaries and trusts. The ‘borrower’ in this instance is the connected party and the terms of the loan
and repayment tend to differ from that of traditional bank finance.
SIC Codes – SIC stands for Standard Industrial Classification. SIC codes are the classification codes for
different forms of economic activity that a business entity can be involved in, in the UK.
Thompson codes – Thomson Directory Classifications are another classification system for businesses
in the UK. Thomson codes are used to categorise businesses into their relevant industry. Each business’s
code(s) is determined by its economic and/or business sector, industry and business activity.
Venture Capital – venture capital is a form of private equity investment used to fund earlier stage,
businesses with high growth potential. Venture Capital Trusts (VCTs) or funds typically invest both
finance and world-leading operational experience to their investee companies to support the businesses
to deliver on their growth potential.
Working capital – calculated as the difference between a company’s net assets and net liabilities,
working capital is the measure of the cash needed to fund the daily operations of the business. It is also
frequently used as a measure of the financial health of a business, as calculating the working capital
ratio determines whether the business is able to meet its short-term obligations.
About Price Bailey
Every business is unique. That’s why at Price Bailey we adopt an individual focus that extends beyond
advice; working together with you to help you reach the best possible outcome.
Speak to us to see how we can help you:
Simon Blake Chand Chudasama

Partner Partner
simon.blake@pricebailey.co.uk chand.chudasama@pricebailey.co.uk
+44 (0) 1223 507639 +44 (0) 2032 91739
+44 (0) 7702 665342 +44 (0) 7824 145475
Eleanor Lothian Mark Ellis

Manager Assistant Manager
eleanor.lothian@pricebailey.co.uk mark.ellis@pricebailey.co.uk
+44 (0) 1223 941 358 +44 (0) 1603 567841
Our offices
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Valuation e Book 2nd Edition

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Valuation e Book 2nd Edition

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2023 - 2nd Edition

A comprehensive guide on how to value a business

At Price Bailey - It’s all about you

A Comprehensive Guide on How to Value a Business 2023 - 2nd edition 04

Why are we writing about this? 05

Understanding value creation - the difference between price and value 09

Enterprise Value and Equity Value 15

Further valuation thoughts 28

Valuation methods: How UK Limited Companies are typically valued 32

What type of valuation do you really need? 61

A Comprehensive Guide on How to

Why are we writing

Why are we writing about this?

Why are we writing about this?

The purpose: 12. There is a dispute between shareholders.

Why are we writing about this?

For example, consider this scenario:

What is often better in this situation is to;

a) Ask a valuer to be appointed jointly and independently or,

Understanding value creation - the difference between price and value

Understanding value creation - the difference between price and value

The four pillars of price and value

01 Net realisable value of the business’s assets and liabilities

02 The normalisation of profits

d. the relevance of the sample.

Understanding value creation - the difference between price and value

03 Purchase price expectations (or the actual valuation)

Understanding value creation - the difference between price and value

Understanding value creation - the difference between price and value

Why are the 4 valuation pillars important?

• Does the advisor really understand my business in depth?

• Are my expectations realistic?

• What would a rationale buyer pay?

• What a rationale buyer would pay?

· In the sector regardless of the nuances of the specific company?

· For a strategic acquirer to pay?

The answer will be very different in each circumstance.

Enterprise Value and Equity Value

Net Debt Adjustment

1. The acquisition will be on a cash-free and debt-free basis, and

Enterprise Value and Equity Value

Equity Value Bridge

This example is explained further below.

The grey areas

Cash-like Debt-like Commonly debt-like Possibly debt-like

Cash from exercised

Tax losses Finance lease and hire

The calculation itself will depend on the business.

It is common in owner-managed business for directors to take remuneration primarily by way of

b. Gross margin volatility

d. Genuinely one off items

Normalised working capital

12 month working capital cycle

Shareholding being valued Low High

Less than 10% 60% 75%

Between 10% to 25% 45% 55%

Between 26% to 49% 30% 40%

50% interest 15% 25%