Is Business Valuation in the Eye of the Beholder? Simon Marsden, of Corporate Finance Firm Gambit, Discusses the Concept of Valuation and How Understanding It Can Help Grow a Business

Western Mail (Cardiff, Wales), May 3, 2017 | Go to article overview

Is Business Valuation in the Eye of the Beholder? Simon Marsden, of Corporate Finance Firm Gambit, Discusses the Concept of Valuation and How Understanding It Can Help Grow a Business


Value is a concept we probably all feel familiar with but, given its subjectivity, one that evokes great emotion and diversity of opinion.

Value or worth is, of course, a personal view, as the value of something can differ greatly in the eyes of individuals where one has a particular need for, or attachment to, the asset in question. This is particularly the case for unique or rare assets such as works of art, antiques or vintage cars.

We have seen a proliferation in the valuation methods applied to businesses, some of which seem to have little bearing on the underlying performance or short-term prosperity of the asset in question.

The past few years have seen the emergence of the so-called "unicorns", the fast-growing breed of start-ups worth in excess of $1bn.

Notable examples are Snapchat at $23.2bn, Facebook paying $19bn for WhatsApp (which had no meaningful revenue) and Uber being valued at over $68bn, which represents 39 to 45 times its revenue.

Closer to home, those of you who watch Dragon's Den, which invites budding entrepreneurs to pitch for investment from five successful investors, will have been mystified at the unrealistic valuations owners ascribe to their businesses. This is as much to do with naivety as it is to being misguided and poorly advised.

The vagaries in some of these valuation methods lead us back to the view that value has to be capable of being measured objectively, based on clearly defined principles. So what does this mean for owner-managers looking to assess and increase the value of their businesses? | What is my business worth? This is without doubt the question we are asked most often when meeting with shareholders and entrepreneurs. It's obvious why. Many of these individuals have invested years of time, effort and resources into their business, often combined with long periods of significant personal sacrifice - so the emotional attachment to value is palpable.

The output from a successful business transition process, whether by internal or external sale, is a one-off opportunity to crystallise value. For most owner-managers it can be a life-changing event, providing a pension fund for retirement and a legacy to leave to future generations.

A business is ultimately worth what someone will pay for it. While this is a truism, it's not particularly helpful to a business owner looking for advice and guidance on what the business will realise in a properly planned and executed transition process.

| What do we mean by valuation? This may sound like an odd question, but we come across lots of business-owners who don't fully understand how businesses are valued. …

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