Business Valuation Methods Used by UK Expert Witnesses
The Three Primary Methods
UK courts do not prescribe a single valuation method - the appropriate method depends on the type of business, the purpose of the valuation, and the legal context. Expert witnesses must justify their choice of method and demonstrate that it produces a reliable result.
1. Discounted Cash Flow (DCF)
Definition: DCF values a business by projecting future cash flows and discounting them back to present value using a risk-adjusted discount rate (typically the Weighted Average Cost of Capital - WACC).
When used: Growing, profitable companies with reliable forecast data - particularly technology firms, professional services, and SaaS businesses.
| Step | Description | Key Variable |
|---|---|---|
| 1. Revenue forecast | Project 3–5 year revenue | Growth rate assumptions |
| 2. Free cash flow | Calculate EBITDA → FCF | EBITDA margin, capex |
| 3. Discount rate | Calculate WACC | Cost of equity, cost of debt |
| 4. Terminal value | Gordon Growth Model or exit multiple | Long-term growth rate |
| 5. Enterprise value | Sum PV of FCFs + terminal value | EV to equity bridge |
Strengths: forward-looking; captures growth potential. Weaknesses: highly sensitive to assumptions; contested in litigation.
2. Maintainable Earnings (Capitalisation of Earnings)
Definition: Values a business by applying an earnings multiple to a normalised, maintainable level of earnings (typically EBIT or EBITDA). The multiple reflects sector, risk, and comparable transaction data.
When used: Established trading companies with stable earnings - traditional businesses and owner-managed SMEs.
| Step | Description | Key Variable |
|---|---|---|
| 1. Normalise earnings | Adjust for owner salary, one-off items, related party transactions | Maintainable EBIT/EBITDA |
| 2. Select multiple | Sector comparables, market data, transaction multiples | EV/EBITDA multiple |
| 3. Apply multiple | Maintainable earnings × multiple | Enterprise value |
| 4. Equity bridge | Deduct net debt, add surplus assets | Equity value |
Strengths: simple, market-referenced. Weaknesses: multiple selection is subjective; contested between experts.
3. Net Asset Value (NAV)
Definition: Values a business based on the value of its underlying assets minus liabilities - at book value, fair value, or forced sale value.
When used: Property-holding companies, investment companies, loss-making businesses, and businesses being wound up.
| Step | Description | Key Variable |
|---|---|---|
| 1. Asset schedule | List all assets (tangible + intangible) | Balance sheet |
| 2. Revalue assets | Mark to market (properties, investments) | Independent valuations |
| 3. Identify liabilities | All debts, contingent liabilities | Legal due diligence |
| 4. NAV | Assets minus liabilities | Going concern or break-up |
Fair Value vs Fair Market Value - UK Legal Context
UK business valuation expert witnesses must apply the valuation standard directed by the court or statute - fair market value in many commercial and tax matters, fair value in S994 unfair prejudice petitions.
| Topic | Fair market value | Fair value (S994) |
|---|---|---|
| Definition | Price between willing buyer and seller without compulsion | Legal standard for unfair prejudice buy-out orders |
| Minority discount | Often applied to minority stakes | Typically disapplied where prejudice is found |
| Typical use | Tax, M&A, commercial transactions | Companies Act 2006 s994 petitions |
| Expert report | CPR Part 35 / open market basis | CPR Part 35; proportionate share of whole company |
See our S994 shareholder dispute valuation guide and solicitor guide to fair value.
Discounts & Premiums
- Minority Discount: reduction for lack of control; contested in S994 - courts often disapply where unfair prejudice is found.
- Control Premium: uplift for majority or controlling stakes.
- Marketability Discount (DLOM): reduction for illiquid private shares; more common in US courts, applied selectively in the UK.
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