Three fundamental ways to measure the value of a business

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In this report we are going to evaluate the value of a chosen company Thorntons PLC using the provided balance sheets and financial statements of the given period. Here we also discussed the alternative forms of finances that are open to Thorntons PLC and its impact on corporate risk and cost of capital. Thorntons is a British chocolate company established by Joseph William Thornton in 1911. Thorntons today is a £180 million turnover company with nearly 400 shops and cafes and around 200 franchises together with internet, mail order and commercial services.

Business valuation approaches

There are three fundamental ways to measure the value of a business

  • Asset approach.
  • Market approach.
  • Income approach.

Asset Based Approach

The asset based approach to business valuation considers the underlying business assets in order to estimate the value of the overall business organization.

The business valuation methods under the Asset Approach include:

  • Asset accumulation method.
  • Capitalized excess earnings method.

Market based Approach

Under the Market Approach to business valuation, one consults the market place for indications of business value. Most commonly, sales of similar businesses are studied to collect comparative evidence that can be used to estimate the value of the subject business. This approach uses the economic principle of competition which seeks to estimate the value of a business in comparison to similar businesses whose value has been recently established by the market.

The business valuation methods under the Market Approach are:

  • Comparative private company transaction method.
  • Comparative publicly traded company transaction method.

Income based Approach

The Income Approach to business valuation uses the economic principle of expectation to determine the value of a business. To do so, one estimates the future returns the business owners can expect to receive from the subject business. These returns are then matched against the risk associated with receiving them fully and on time. The returns are estimated as either a single value or a stream of income expected to be received by the business owners in the future. The risk is then quantified by means of the so-called capitalization or discount rates. The methods which rely upon a single measure of business earnings are referred to as direct capitalization methods. Those methods that utilize a stream of income are known as the discounting methods. The discounting methods account for the time value of money directly and determine the value of the business enterprise as the present value of the projected income stream.

The methods under the Income Approach include:

  • Discounted cash flow method.
  • Multiple of discretionary earnings method.
  • Capitalization of earnings method.

In this report we are going to valuate the Thorntons PLC by using the market based valuation technique. The market approach determines the business value by comparing one or more aspects of Subject Company to the similar aspects of similar company which have an established market value. Market based approach is one of the best valuation methods since no conjectures to be done. This model captures the current trend of the market and it is often simpler to use than the asset based approach and income based approach. This model also requires less information than the other models. So this model is easy to understand and present to the clients.

The one and only biggest disadvantage in this model is it is very difficult to acquire the data of comparing markets. It can be hard to find any transaction to compare with and every trade has its own condition, furthermore the comparing is based on the short time market trend looking at the present situation which results loosing the long term trends. We are using the Comparative Transaction Method to estimate the value of the given business. Under this method, one determines the so-called valuation multiples which relate some measure of business financial performance to its potential selling price. Typical valuation multiples are:

  • Price divided by the business gross revenues or net sales.
  • Price divided by the seller's discretionary cash flow.
  • Price divided by the business net cash flow.
  • Price divided by EBIT, EBT, or EBITDA.
  • Price divided by the fair market value of the business asset base.

All the above multiplication factors are statistically derived from the data selling prices and trends of the similar business group in the same industry. For more accurate results it is better to take the weighted average of lowest medium and highest values of multiplication factors. In this report we are giving 50% weight to medium and 25% to each lowest and highest value of multiplication factors.

Price divided by the business gross revenues or net sales

Lowest (25%): 0.1010

Medium (50%): 0.7099

Highest (25%): 1.7900

Weighted average: 0.8277

Price divided by the seller's discretionary cash flow

Lowest (25%): 0.7600

Medium (50%): 2.3850

Highest (25%): 3.2200

Weighted average: 2.1875

Price divided by the business net cash flow

Lowest (25%): 0.8000

Medium (50%): 2.3700

Highest (25%): 3.5500

Weighted average: 2.2725

Price divided by EBIT, EBT, or EBITDA

Lowest (25%): 0.8400

Medium (50%): 12.0010

Highest (25%): 15.1250

Weighted average: 9.9918

Price divided by the fair market value of the business asset base

Lowest (25%): 0.7500

Medium (50%): 7.0555

Highest (25%): 18.4553

Weighted average: 8.3290

To calculate the value of a business using this market approach model we need some inputs from the company's financial statement are

  • Gross revenue
  • Seller's discretionary cash flow
  • Net cash flow
  • The total assets

In this report we can get these values from the given financial statements of Thorntons PLC which are attached at the end.

Actual Values (£'000)

Weighted Valuation


Estimated value


Price based on Gross





Price based on Sellers Discretionary Cash Flow




Price based on Net Cash Flow




Price based on EBITDA




Price based on Total







By the above calculation we determined the value of Thorntons PLC as £309,580,000

Currant finance structure of Thorntons PLC

Thorntons PLC is one of the biggest chocolate manufactures in UK's chocolate industry, with £214,805,000 revenue and £104,969,000 gross profit and £26,674,000 net debt. Thorntons PLC market cap is around £78.83 million with current share price of £108 by issuing 68.363 million shares. Shortly after the end of the financial year the Group negotiated new committed banking facilities with HSBC, Lloyds TSB Bank and Santander/Alliance & Leicester totalling £52.5 million for a three year period. The costs of these facilities are higher than those of existing facilities but are in line with market rates and provide certainty of funding for the medium term. Covenants are set at levels which are broadly similar to those in the previous agreements.

Interest rate risk

Funding received from banks is at floating rates fixed in the short term for the duration of each loan. Floating rate borrowings are exposed to the risk of rising interest rates. Borrowings of a longer-term nature, such as those required to fund fixed asset acquisitions, are funded through finance leases such that total finance lease exposure remains broadly constant from year to year and to this extent provides an element of fixed interest borrowing.

Liquidity risk

Thorntons PLC uses banking facilities and finance leases as its primary sources of funding. The Group has historically been very cash generative. The bank position and headroom of the Group is monitored daily and capital expenditure has to be approved in accordance with its policy which defines the level of authorisation required. Since the end of the financial year the Group negotiated new committed banking facilities totalling £52.5 million for a three year period which consist of a revolving credit facility of £52.5 million shared among three banks and committed for three years. The Group also has a short-term committed overdraft facility of £2.5 million.

Capital risk

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Gearing ratio

Consistent with others in the industry, the Group monitors capital on the basis of gearing ratio. This ratio is calculated as net debt divided by total equity. Net debt is calculated as total borrowings (including ‘current and non-current borrowings' as shown in the balance sheet) less cash and cash equivalents. The Group's strategy is to seek to maintain or reduce the level of net debt and improve operating cash flow. The gearing ratios at 27 June 2009 and 28 June 2008 were,

Net debt £26,674,000

Equity £28,738,000

Gearing ratio 92.8%

Weighted average cost of the capital (WACC).

Cost of debt:

kd = Int (1-t).

kd = cost of debt.

Int = interest rate (Total interest paid/total current liabilities)

22.47% as per given financial statements

T=tax rate for the company 28% given

Cost of debt = 16.18

Cost of equity:

Dividend per share = £6.5.

Current market value of share= £108.

Growth rate = £6.8 in 2008 and now it is £6.4 in 2006

= 1.5%

Cost of equity= 7.52%.

Weighted average cost of the capital:
Re = cost of equity = 7.52%
Rd = cost of debt = 16.18%
E = market value of the firm's equity = £28,738,000
D =market value of the firm's debt =£26,674,000
V = E + D = £55,412,000
E/V = percentage of financing that is equity = 51.86%
D/V = percentage of financing that is debt = 48.14%
Tc =corporate tax rate 28%

WACC= 9.51%


By considering the financial statements of FY2009 of Thorntons PLC and the present trends in the market by Financial times ratios we estimated the company's value and also discussed about the risks which the company facing at the moment. For the last few years the company's dividend per share as fallen by 5%, but the sales are increased and also it reduced its operating costs, the Company agreed new committed bank facilities for three years and as a result the Company is well placed to continue its long-term growth strategy and we must remain optimistic about the future.