If you’re a business owner, the chances are you will want to know how to increase the value of your business. It’s important for any entrepreneur or business owner to have an idea of what their company is worth, especially if they are looking to either raise investment or plan an exit.
Building a business can be an extremely turbulent time and involves a lot of hard work. There is no doubt you want all this work to be reflected when the value of the business is being determined. As many business owners are unaware or underestimate what the business valuation process entails, we’ll first explore this process in simplistic terms.
Business analysts often use a variety of techniques to value a business. This includes looking at the overarching industry, competitors, risks, profitability and assets of the business. They also consider external factors and market forces and this is where things get interesting. To better illustrate the impact of market forces on the value of a business, let’s look at why, at the time of writing, Tesla is worth upwards of $500 billion.
We wouldn’t be reaching when we say that Tesla is doing something different and that it stands out amongst other car manufacturers. Tesla’s mission statement is to produce a sustainable mass market electric car as soon as possible. To achieve this goal, Tesla is required to make big leaps in what is considered to be possible from a technological and scientific perspective.
In the year to March 2021 alone, the company spent a whopping $1.833 billion on their research and development (R&D) and even acquired other businesses to reach their goals, such as SolarCity. Their focus on innovation and a forward thinking mentality helps fuel the public’s perception of its value. That’s why when thinking of Tesla, you are thinking of a car manufacturer, a tech company, and a hardware supplier. Tesla’s isn’t just selling a car but a total experience.
Despite making solid efforts towards their goal, Tesla has not yet reached it, but this hasn’t prevented Tesla’s stock from increasing over 20,000% since its IPO. Although the market value of Tesla is the subject of much debate, it is not hard to argue that the majority of Tesla’s worth stems from the fact that it is at the forefront of the industry because of R&D and its efforts in innovation.
Whilst only a small percentage of businesses can benefit from the same level of investment and fanfare as Tesla, we can still learn some valuable lessons. To put it succinctly, companies which innovate and quantify their R&D costs are inherently more valuable than their industrial counterparts. They can therefore command a higher value and we’ve seen this first hand with our clients.
For example, one of our clients was able to increase the value of their business by 200% by demonstrating that their business has been successful in claiming R&D tax relief. By claiming R&D tax relief, the business reveals that they have attempted to resolve a scientific or technological uncertainty, however big or small. We can’t all be Tesla’s but it doesn’t mean that we aren’t always building something new or improving on the past. But why would quantifying R&D expenditure have such an impact on the value of the business?
It comes down to one of the pillars of valuation; the premise of value. The premise of value takes into account what the business will be worth past the valuation date, which is to say what profit can the business sustain and what attempts are being made to increase this. Claiming for R&D tax relief is intrinsically tied to this premise.
Similarly to how investors value Tesla highly because of their innovation, by claiming R&D tax relief you are demonstrating that the business is actively involved in developing new products, services or processes in the hope of bringing these to market.
This work should be expected to lead to new revenue streams or reductions in cost elsewhere, if the R&D project is ultimately successful. Notwithstanding this, there is additional value in the scheme itself, which can result in either a cash payment from the government, or a reduction in the corporation tax liability of the business. The benefit of identifying R&D is therefore two fold, it dictates a higher valuation and ultimately improves the bottom line of the business. It should then come as no surprise that companies which are actively engaged in R&D work are naturally considered to be more valuable, as they strive to innovate and stay ahead of their competitors.
If you want to learn more about R&D tax relief or take advantage of the scheme, we have a range of ways for you to do that. You can talk to one of our expert consultants at Optimal Compliance that will be happy to help, or you can head straight to our software solution called Novel which allows you to jump straight in and prepare an R&D claim without the need to speak to a consultant.