Following on from our blog last month, “What’s your exit plan?” where we looked at what you need to think about when considering selling your business, this article focuses specifically on how to value your business.
Whether you’re looking to sell or just need further investment to grow the business, you need to be able to accurately assess how much your business is worth.
Some things that may affect your business include:
- Your finances, including cash flow, historical and future profit
- How much your competitors are worth
- Intellectual property you own
- Relationships with customers
- Assets and debts
- The number of regular orders
- Brand name and reputation.
Ways to value your business
There are many ways to value your business. These include:
- Price-to-earnings ratio or multiple of profits: your monthly/annual profits shouldn’t include one-off costs or purchases. You’ll also need to include any additional costs or gains your business may make after being sold. Your final figure is known as “normalised” profits. You’ll then need to multiply this figure by a factor dependent on the industry and type of business (e.g. 5-10 times may be suitable for a business with a long order book). This method is suited to businesses that have an established track record of profits;
- Asset valuation: when looking at the net-book value of your business (i.e. total assets minus total liabilities), make sure you take into account inflation, depreciation or appreciation;
- Going concern valuation: this involves placing a value on a business that will continue to operate. It requires work to normalise earnings and eliminate assets or revenue streams that don’t form part of the core asset base or main revenue of the business;
- Liquidation valuation: take the current market valuation of all business assets and deduct liabilities and liquidation fees. The value is what you would end up with if you sold all your assets and paid off all liabilities;
- Similar businesses: take a look at sales of similar sized businesses who are selling services/products similar to you, to get an indication of what your business may be worth;
- Discounted cash flow: this is rather more complex and involves estimating what future cash flow would be worth today. As this takes into account future cash flow, be sure to take into account inflation and discount the future cash flows to reflect both the risk of the business and the value of future cash flows. This is the best method to use if your business has stable cash flows;
- Entry cost: this considers the cost of setting up a similar business to the one being valued.
Other factors to consider
You don’t want to understate the value of your business but equally make sure that you are realistic in your expectations.
Ultimately, a business is worth what someone is willing to pay for it and if a business has good relationships with customers and suppliers, it will be more appealing to a buyer.
All potential buyers will see different risks associated with a business which may lower its value. You’ll need to pre-empt what these may be and minimise them.
Practical next steps
There are lots of things you can do to ensure a good valuation for your business, including:
- Having a good business plan: this will help you focus on short-term and long-term goals;
- Reduce your risk;
- Get an expert’s advice: this could be your accountant who can advise you about possible valuations and how much similar businesses sold for;
- Have a look online for similar businesses that are for sale and decide which is the best way to value your business;
- Protect the value of intangible assets such as trademarks and designs as potential buyers will want to know you’ve done this.
Have you got the right people in place?
Find out how our specialist finance recruitment team can help form the bedrock of your business planning and finance needs with our permanent, interim and part-time finance staff. Get in touch today for an initial consultation.