This `Business Health Check Service` measures the overall value of the business for commercial purposes and provides a detailed strategic plan unique to your business position. The positive way forward to compete on a global basis.

Valuation Methods

 There are several methods to choose.

1.    Book Value

Total assets minus liabilities. This method however, ignores the future return the assets can produce and is calculated using accounting practice that does not reflect how much the business is worth to someone who may buy it as a going concern.

2.    Market Value

This is for quoted companies only. Is derived by multiplying the quoted share price of the company by the number of issued shares. This valuation reflects the price that the market at a point in time is prepared to pay for the shares. It is therefore influenced by the condition of the stock market, the concerns or opportunities that are seen for the company in the sector or market in which it operates. Also, the investors view of the ability of management to deliver a return on the capital he or she is using, It may anticipate some of the synergies that acquisitions may bring, but is likely to have less of a grasp on the potential as a buyer from the same industry. For companies not listed on stock markets there is obviously no group of investors setting a value on the business on a day to day basis.

3.    Discounted cash flow method.

DCF uses the future free cash flow the company (after all liabilities have been met) discounted by the firms weighted average cost of capital (the average cost of all the capital used in the business, including debt and equity), plus a risk factor measured by beta. Beta is an adjustment that uses historical data to measure the sensitivity of the company's cash flow, for example, through business cycles. This means that companies in highly cyclical businesses will have a high beta to reflect the volatile nature of their cash flow.

The DCF method is a strong valuation tool, as it concentrates on cash generation potential of a business. However, the risk factor, measured by the beta, is impossible to measure precisely.

4.    Price-earning ratio.

PE ratio, This is a popular method due to its simplicity. For non-listed companies wishing to use this method, a comparable quoted company/sector should be used. The difficulty here is in the selection of a comparable company. There could be differences in accounting methods (i.e. treatment of intangible assets, like R&D) or an artificially boosted PE ratio due to a typical drop in earnings.

Among many investment professionals, use of accounting net earnings for valuation has declined in favour of cash-flow measurements which are seen as a cleaner figure less influenced by the vagaries of accounting practice.

5.    Profit/Sales multiple.

This method is sometimes used to value the SME sector by multiplying a year's net profit or sales by a certain number, determined as the appropriate multiple for the type of business. This approach particularly with small to medium sized businesses has little or no scientific methodology behind it, as it assumes automatically that what has gone before will continue in the future.

The Two Stage Approach

Stage One

There are two factors, which form the valuation of an enterprise. They are the future cash flow generation by the business and the risks associated with generating it, and the analysis quantifying the external environment on the three levels under which the business operates. All businesses are subject to external variables, which can have a positive or negative effect on the success of the enterprise. Generally outside the control of management they will form part of the overall risk of the investment. These risk variables cover the climate of the economy, the age and structure of the industry and the competitive market position. This forms the first part of the analysis, which will determine the attractiveness of the investment. We have called the scoring mechanism the `gamma` rating.

Complete Appraisal

As an analogy, the higher you travel vertically in a helicopter, the wider will be your view of the ground. In the appraisal of an organization, this entails viewing the business from an external perspective by analysing, the local market, in the context of the industry and the general state of the macro economy.

For the valuation of the business, the process of analysis has to include the more general economic situation, as it will generate a climate that may or may not be conducive to investment success. Little can be gained from an untimely investment, unless you are willing to accept short-term losses. 

We have therefore designed a questionnaire to address the relevant variables of each section, weighted the possible answers according to their importance and assigned each answer a score which, when collated with the answers from questions on the industry and market sections, make up the `gamma` rating.

The Gamma 

Each question in the first stage of the valuation process is assigned a value, within a pre-determined range, its position dependent on its level of influence on the attractiveness of investment conditions. Each answer is weighted according to its level of importance and its effect on the other variables in the section. For instance, the level of inflation will have an effect on interest rates, as the central bank will attempt to stimulate or dampen demand by reducing or increasing rates. 

To avoid a linear plane when plotting different attractive scores, which would leave out extremes, we utilise the normal distribution curve and measure from a mean. This avoids penalising or rewarding those organisations that have a marked difference in non-financial performance scores relative to their nearest competitor. For instance, two businesses may operate in the same industry and the same market place. However, by prudent choice or luck, a business may find itself better positioned, though the adoption of better tactics than its competitor. 

At the end of the first stage of the analysis, which has covered macro economics, industry conditions and market competition profile. The investment is awarded an overall score which is then added to the firms weighted average cost of capital figure to find the discount factor which has now taken into consideration the specific risk and expected return. 

Stage Two 

The second stage utilises the discounted free cash flow method to forecast the cash generation capability of the business.  Adding together the weighted average cost of capital (WACC) and the gamma score, produced at the end of stage one will determine the discounted factor. This differs from the historical use of beta to determine the market risk factor. Gamma calculates the individual firm's attractiveness without the need to rely on a market proxy to determine how the value of the investment will more relative to its market.

The process to determine the free cash flows to discount, are taken from the previous accounting results of the business and extrapolated for a maximum of five years, as it is unrealistic to determine growth or decline beyond this time scale. It is however, assumed that the business is expected to be a going concern beyond this period. The ongoing value cash flow is assessed and added to the annual figures to arrive at the value of operations. 

The continuing value is the accumulated book value figure calculated by deducting balance sheet liabilities from assets. The components of the analysis to be provided for business planning.

Summary

The information is designed to employ a number of logical steps to provide the Directors/owners with a valuation of the business, based on the macro environment, the condition of the market in which the business being valued operates, sales growth and the value of current and future cashflows.

The final report will identify areas of weakness in the valuation and give the Directors/Owners action points that can be undertaken to improve the value of the business.

Overall, our objective is to assist you in `getting the most out of your business`. 

This powerful report will cost you £495 per business.