How to Value Your Business
If you’re selling your business, one of the main challenges is what you think the business is worth and what the person on the other side of the bargaining table thinks it is worth, are usually two different figures.
Deciding on a market value
Regardless of the method anyone uses to value a business, it’s simply a matter of finding someone who will pay what you’re asking. Theoretically if no-one wants your business then it’s worth nothing (apart from the second hand sale of any assets or inventory).
Past cash flow, profitability, and asset values are the starting points but it’s often the hard-to-measure factors such as key business relationships, reliable suppliers, loyal customers and goodwill that provide the most value.
To assist in this process it’s usual to arrange a business valuation with a business broker, accountant or valuation expert with experience in your industry.
Factors influencing value
Length of time
Remember, the true value of a business is always what someone is willing to pay for it. To arrive at this figure, buyers use various valuation methods, often to give a sense of reassurance that they are not paying too much. The main methods are as follows:
Add up the assets of a business, subtract the liabilities, and you have an asset valuation – nice and simple. So if your business has $500,000 in machinery and equipment, and owes $50,000 on equipment finance, the asset value of the business is $450,000.
A buyer could decide to just buy the assets of a business rather than take over the business as a going concern. Take into account:
- Property or other fixed assets that may have changed in value. Just because an asset is ‘valued’ at a cost on the balance sheet, doesn’t mean that’s what you should sell it for.
- Assets that you’ve added value to, for example that have been installed, or improved. These may be worth more than just book value.
Entry cost valuation
An entry cost valuation reflects what it would cost someone to start the business from scratch, as it’s always an option for them. To make an entry cost valuation, calculate the cost of:
- Purchasing or financing assets and developing the products or services.
- Recruiting and training employees.
- Building up a customer base and generating repeat business.
- Knowledge of networks, suppliers, competitors and processes.
Industry rules of thumb
In some industry sectors, buying and selling businesses is common. This has led to industry-wide rules of thumb that are typically considered in valuing the business. These rules of thumb are dependent on factors other than profit. For example:
- Turnover for a computer maintenance business or monthly recurring revenue for a subscription business.
- Number of customers for a mobile phone airtime provider.
- Number of outlets for a real estate agency business.
- Net profit multiplied by an industry standard number.
Buyers will work out what the business is worth to them especially if they can merge your customer base with their existing business.
- Determine which method of valuing your business creates the most value for you.
- Get expert advice as there are other valuation methods such as price earning ratios. Talk to your accountant, lawyer, a business broker, your banker or small business adviser about possible valuations of your business.
- Search online for similar businesses that are for sale to get a feel for the market of similar businesses for sale and what they were sold for. Remember that ultimately, your business is worth whatever someone will pay for it.
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