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From getting a medical opinion to ordering a pizza, almost anything can be done online. So, free online valuation calculators are a seemingly attractive way to check the valuation of your business when considering a share sale or trying to resolve a shareholders’ dispute. But just how reliable are these tools?
During November 2017, we surveyed the 10 most popular online business valuation calculators as ranked by Google in the UK. The majority are operated by sell-side agents and are used to generate leads for their business sales function. Seven out of the 10 sites tested require only a few simple inputs to produce a result, typically industry sector, turnover, and profit.
Ring my bell
The highest ranked calculator is Company Valuation Services, a site operated by KBS Corporate, a business sale broker. The calculator allows you to select industry sector and input historical and forecast financial data. The result is a scientific looking bell curve with a mid-point valuation and lower and upper quartile valuations. But curiously, when we inputted a range of different data this calculator always came up with the exactly the same result! Regardless of the size of business, industry sector, or growth prospects, the mid-point valuation was always a multiple of 6x EBITDA (earnings before interest, tax, depreciation and amortisation) with a lower quartile of 3x and upper quartile of 9x.
We found a similar issue with valuemybusiness.co.uk, which also produced the same valuations regardless of industry sector, although it did vary the valuation multiple depending upon the size of the business. The calculator run by bizdaq does change valuations between industry sectors, however, all businesses in an industry are valued with the same valuation multiple regardless of size and growth prospects.
The Pomanda calculator extracts financial data for a given company directly from Companies House, although this can be edited if required. The industry selector is more sophisticated than other calculators as it allows you select and weight several markets and the valuation does take into account relative size of business, but not future growth or any qualitative measures.
Interestingly, the two accountancy firms that have calculators in the top 10 listing and value-business.co.uk have all decided to dispense with asking for industry sector, presumably considering sector to be irrelevant to the business valuation.
At the time of testing the Daltons Business calculator seemed to have broken down and was applying a valuation multiple to the inputted net assets figure rather than profit, which produced some pretty crazy results.
The calculator operated by business broker, Hyde House, is a licensed product from business coach firm The Value Builder System of Canada. After asking lots of questions it disappointingly only produces a “saleability” score online but no actual valuation.
Tick in the box
We found only three calculators that made any attempt to capture more in-depth and qualitative data about the business. Questions asked usually covered areas such as management, customer base, the market, and sales function. However, the constraining tick box style used by all of these sites (e.g. answer “yes”, “no”, or “sometimes”) causes us to doubt if any meaningful data is really being collected and properly evaluated.
The calculator that required the most comprehensive data input was Equidam, which is also the only one that claimed to use discounted cash flow and venture capital returns modelling (paid upgrade needed) alongside more traditional market multiples. However, the site is designed very much for start-up/early stage and technology businesses and the free calculator generates curious valuations for mature profitable businesses.
The main problem with all of these sites is that they merely calculate a valuation from inputs (sometimes very few, occasionally many) provided by the user. As every valuation expert knows, the mechanical calculations are always the easy bit in any valuation assignment. The key part in developing a sound valuation is getting under the skin of the business, understanding the real drivers of value, what features and synergy opportunities might attract a range of potential purchasers, and what market and valuation data is truly relevant to the business. None of the online calculators come anywhere near being able to produce suitably robust valuations for real world M&A deals, dispute resolution, or fund raisings.
Online business valuation calculators are rather like horoscopes – a bit of fun and through pure luck sometimes they will be right. Just don’t rely on them to predict your business fortunes.
For further information about business valuations please contact:
Head of Valuation
D: 01926 468705
Summary of survey results
|1||www.company-valuation-services.co.uk||Business sale broker||Numerical and sector|
|2||www.pomanda.com||Information portal||Numerical and sector|
|3||www.equidam.com||Information portal||Numerical, sector and tick box answers|
|5||https://www.mybizdaq.com/valuation||Business sale broker||Numerical and sector|
|7||http://www.valuemybusiness.co.uk/||Business sale broker||Numerical and sector|
|8||http://www.hhcbs.co.uk/value||Business sale broker||Numerical, sector and tick box answers|
|9||https://www.daltonsbusiness.com/business-value-calculator-result||Business sale website||Numerical and sector|
|10||http://www.value-business.co.uk/businesscalculator.aspx||Information portal||Numerical and tick box answers|
Data collected between 20th and 27th November 2017