Contractors' Questions: How to value my limited company?

Contractor’s Question: How do I value my one-person limited company now that I’ve got an unexpected offer on it? The offer has been made by a former client after I rejected their initial offer to take me on as one of their employees, with a view to making my niche IT service one of their in-house offerings.

With that same goal in mind, the would-be acquirer has signalled that they want to purchase my company name and website. To start the ball rolling, I’ve handed over my trading figures and full accounts for the last two financial years, plus 2013-14 figures with a forecast for the rest of the year. They will see that this year’s profit has already surpassed last year’s but, other than this strong balance sheet, what else should I consider when valuing my business and, ultimately, should I sell it?

Expert’s Answer: Typically within the IT industry, contractors will use a limited company such as yours as a vehicle to trade through. Usually, these limited companies have negligible values as they do not hold any assets other than the individual who generates the income - and the contract is a fixed term agreement with a client, and potentially a second contract with a recruitment agency.

From your question it is not possible to tell whether your company has developed systems or processes that could be valuable to your initial client, or its competitors. Assuming there are no other revenue streams generated, then a limited company used by a contractor in the IT industry could have the following key drivers of value:

  • Intellectual Property (IP) developed within the business;
  • unique methods or processes for completing work;
  • respected brand or website;
  • your knowledge, which they would like to prevent competition from accessing.

These key drivers would be valued by understanding what the cost would be to the acquirer to develop them, whilst also taking into account the time savings of not having to develop them. A website domain name can hold value itself, if desirable.

Your current year trading to date suggests that your limited company is growing at a significant rate and, if sold now, the projected growth of your business should be taken into account. You would need to consider your future profits and the amount that you would be giving up in exchange for a salary package. As a rough guide, you might apply a multiple in the region of four to six to the profits before interest tax and depreciation, adjusted to reflect your salary going forwards.

As to whether you should sell your company, there are a number of factors we would advise you take into account when considering this:

  • Whether the value they placed on your business is reasonable;
  • The impact that the transition from self-employed to employee will have, including on:

       - your work-life balance

       - the competitiveness of your salary compared to your current earnings;

  • How you will be receiving the consideration. Whether cash (now or deferred), shares or a combination;
  • Whether a secure salary package will reduce your risk.

Remember, whether you should or shouldn’t sell your business will depend on factors like these which will impact you solely, so only you can make this important decision.

The expert was Matthew Meadows, a corporate finance partner at top 20 chartered accountancy firm Kingston Smith LLP

Wednesday 9th October 2013