Market value of business calculation

reader
reader Experienced MentorMAAT, AAT Licensed Accountant Posts: 1,042
Hi

I have a client whose mum is selling her sole trade business to him. No money will actually change hands but I'm just wondering how people go about calculating the market value of a business in a HMRC-friendly way?

Comments

  • PGM
    PGM Font Of All Knowledge Registered Posts: 1,954
    Two of the main methods;

    1 Asset value; stock, property, tools, equip etc.

    2 Price to earnings; based on so many times its annual profit

    Obviously the first way would be easier to justify with valuations.
  • hunterhouse
    hunterhouse Settling In Nicely Registered Posts: 17
    You may wish to consider:

    3) Third party valuation.

    As alluded to, a P/E based valuation does not readily lend itself to small sole-trader businesses.

    Hunterhouse
  • reader
    reader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,042
    PGM wrote: »
    Two of the main methods;

    1 Asset value; stock, property, tools, equip etc.

    2 Price to earnings; based on so many times its annual profit

    Obviously the first way would be easier to justify with valuations.

    Thanks for this.

    How would you value the intangibles, e.g. goodwill.

    The business (internet trader) has a website and sell branded products.
  • SandyHood
    SandyHood Font Of All Knowledge Registered, Moderator Posts: 2,034
    I've used the multiple of earnings in the past.
    For example three times the average annual profit from the last two years.
    Effectively the person acquiring the business is buying the right to future profits so these can be valued in a rough and ready way based on the past.
    If your studies go into the more formal valuations you would forecast future cash flows and discount them to get a value. Three times the average in the past is a rough approximation of this discounted figure.

    When it is a family transaction, the parties can agree something else. This might be based on their individual tax positions. Go back and ask them both. You have an obligation to report accurately to the HMRC. They need to decide how much the Mum is selling to her son. If the payment for the business is deferred, this could be a staged transfer. Your point about no money changing hands needs to be clearer. Is it a gift? Talk to the parties. The question as it stands does not have enough information to elicit a useful answer. Don't be a party to anything that might compromise your own integrity.
    Sandy
    [email protected]
    www.sandyhood.com
  • reader
    reader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,042
    SandyHood wrote: »
    I've used the multiple of earnings in the past.
    For example three times the average annual profit from the last two years.
    Effectively the person acquiring the business is buying the right to future profits so these can be valued in a rough and ready way based on the past.
    If your studies go into the more formal valuations you would forecast future cash flows and discount them to get a value. Three times the average in the past is a rough approximation of this discounted figure.

    When it is a family transaction, the parties can agree something else. This might be based on their individual tax positions. Go back and ask them both. You have an obligation to report accurately to the HMRC. They need to decide how much the Mum is selling to her son. If the payment for the business is deferred, this could be a staged transfer. Your point about no money changing hands needs to be clearer. Is it a gift? Talk to the parties. The question as it stands does not have enough information to elicit a useful answer. Don't be a party to anything that might compromise your own integrity.

    Indeed; HMRC will be interested in the business' market value as opposed to anything agreed between mum and son.

    Yes, it is a gift, the mother is retiring and is giving her business to her son for free. Therefore I should probably be looking at Gifts Hold Over Relief as opposed to Entrepreneur's relief.
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