Chapter 16 • Small businesses
lBusiness sold to another business.
lBusiness obtains a listing on the Stock Exchange or Alternative Investment
Market (AIM) – see below.
l A Stock Exchange or AIM listing is a major event for a small business, mov-
ing it into a different league, and it is very expensive.
l AIM is a market set up by the Stock Exchange for smaller businesses, but it is
claimed that it is nearly as expensive to obtain a listing there as on the main
Stock Exchange.
l Can be unrealistic to expect existing shareholders to take up new shares
because:
lthey may not have the funds available;
lthey may be unwilling to commit additional funds to the business because
of the lack of an exit route.
l Finance for small businesses might be provided by:
lventure capitalists who support new, expanding, entrepreneurial busi-
nesses, often taking a fairly active role in the business’s management. They
are professional investors, in some cases using funds supplied by a number
of small investors;
lbusiness angels, who are typically individuals who take equity stakes of up
to about £50,000 and take a close interest in the business.Valuing small businesses
l Cannot rely on a price for shares determined by an efficient market.
l Four approaches used in practice:
1 Dividend yield (DY):- Based on the assumption that two businesses, similar in all respects
except that one is listed and the other one not, should have the same DY. - Usually discount the calculated price to take account of non-marketability.
- Difficult to find two such businesses.
2 Price/earnings (P/E): - Based on the assumption that two businesses, similar in all respects
except that one is listed and the other one not, should have the same
P/E. - Usually discount the calculated price to take account of non-marketability.
- Difficult to find two such businesses.
3 Net assets: - Total the values of the various assets of the business, deduct the liabil-
ities and divide by the number of shares to find the value per share. - Balance sheet values can be misleading; market values of assets may be
better than book values. - Tends not to look at future earnings.