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How To Value Your Business And Find Out Its Worth

how much is my business worth

If you are looking to sell your business or need to release cash from it, one of the first questions that you will ask yourself is ‘How much is my business worth’. 

With all the time, effort and energy that you’ve put into your business, it can be hard to be objective when putting a figure on its value, which is why there are established factors to be considered when determining the official value of your business. 

Read on to learn which factors will affect the value of what you’ve built and how you can achieve the best price when selling your business.

What is a Business Valuation?

To understand the economic value of your business and to become familiar with the current market trends that bring buyers to you, it is important to get a business valuation.

A business valuation is the process used to work out the economic value of the company and is commonly used for the sale of a business, equity financing, mergers and acquisitions, estate and gift planning, and dispute resolution.

With a business valuation report, you will know exactly what your business would fetch in the market which in turn can help you to set a fair sale price. If you are looking to negotiate with potential buyers to sell your business at a profitable price, a business valuation is your starting point.

Why do People Sell Businesses?

A business can be sold for plenty of reasons, be it financial necessity, or a personal choice.

A few instances where a business is commonly sold include:

  • When the owner of a successful business wants to retire and enjoy the fruits of his labour.
  • When a business owner wants to finance other larger expenditures.
  • When a business owner wants to specialise in one business instead of 10 others.
  • When a business wants to downsize to optimise its profits and productivity.

Regardless of your reason to sell, a business valuation is a great way to get an accurate valuation figure of what your business is worth.

Why is it Important to Know your Business’s Value?

Every business owner intending to sell wants the best price for their business. Whilst many factors could impact the value of your business, a valuation sets the key variables out in a structured way, making it an objective way to set a price on the business.

Knowing the value of your business is important for being able to kick-start negotiations with potential buyers. It’s also important if you’re looking for funding or further investment for your next project. Any bank, building society or other lender will want to see an official valuation report of your business’s worth before they agree to lend you money.

Lenders need to know how their investment will be protected and how they could seek to repay the loan should there be a default on the repayments. Providing a business valuation to these establishments helps them to manage that risk. Without a valuation, you will be unable to provide the information that they need.

A business valuation is also required for tax purposes. When submitting an annual self-assessment tax return – which is required for directors of companies, then you will need to be able to provide a value so that the amount of tax due can be correctly calculated.

As you can see, a business valuation has plenty of uses – not just at the point of sale. Many business owners conduct regular business valuations as a good way to keep track of market trends and current assets owned.

What Factors Affect Business Value?

A business’s value can be impacted by many factors. Some of these will directly impact any official business valuation, and some will affect its perceived value with potential buyers.

Reasons for selling

The value of your business can fluctuate depending on the reason that you want to sell it. If you are selling your business because of dwindling sales, or with the hope of retiring, it gives potential buyers the signal that you want a quick sell.

This can reduce room for negotiation and businesses often end up being sold for less than what they are valued. However, if you are looking to sell a successful business to a buyer who understands the nuances of your field, the value of your business will become notably high.

The age of the business

A tried and tested business module with consistent profits will be more valuable than a new, undeveloped business that lacks maturity.

Tangible vs. Intangible assets

Tangible assets like property, equipment and inventory hold resale value of their own which can increase the overall business valuation. Intangible assets cover things like customer lists, reputation and intellectual property. The latter items are harder to value, so will not impact the valuation so much as the former.

Liabilities

If you are looking to sell, it is advisable to maintain full disclosure about your business’s assets, debts and liabilities. From then on, it becomes easier to negotiate smoothly and reasonably.

The industry

The value of businesses differs from one industry to another. Industries with larger profit margins or wider geographical reach will likely be more valuable than when the opposite is true. For example, a raw material supply business will be worth more than a restaurant. This is because the former has an industrial demand with worldwide scope whereas the latter has geographical constraints.

Market demand

Focus on improving the consumer demand for your goods and services with effective sales and marketing strategies. This makes potential buyers want to buy your business readily and for a higher price.

Location

Where a business is located and operates can impact a valuation greatly. For example, a business hub in a wealthy area that is close to key infrastructure that attracts wealthy customers is likely to be more valuable than one in the middle of the countryside with poor transport links and staffing opportunities.

Relationships with key suppliers and customers

Having a strong relationship with key suppliers and a returning clientele provides a stable business with a consistent potential for growth. This reflects well on your business’s valuation.

Stability in key management positions

Having stable administrative staff in key management positions shows that the business has low staff turnover, which is a good indicator of staff morale and positive company culture. This also signals potential buyers that your business would require less time to adapt to as there would be existing experience within the business to call upon during the handover.

How to Value a Business

There are several ways to value a business. Here are some of the commonly used methods:

    • Value of assets: This method combines the tangible and intangible assets of a business to arrive at a fair market value of the overall assets of any business.
  • Price-earnings ratio: This method involves valuing a business with the revenue it generates. This can be calculated by dividing the business’s market price by its revenue at the time of valuation. 
  • Start-up costs: As the name suggests, this valuation method calculates the amount of expenditure that would be incurred if one were to invest in a similar business model. While adopting this method, all start-up fees, taxes, assets, research and development costs are also taken note of.
  • Discounted cash flow: By discounting cash flows at the rate of risks involved in the business, this method enables valuation to take note of its future cash flows.
  • Industry rules of thumb: This is a common way to value a business – by using general guidelines to value a business based on its industry. For example, valuing a tech industry business would be 4 times the sum of its annual revenue. This is of course a more subjective way of vaulting a business so shouldn’t be relied on.

The method you use to value your business will depend on the type of business you have and the industry you are in. You should speak to a valuation expert to get an accurate understanding of your business’s worth.

How Buyers Value a Business

When you are seeking potential buyers or investors, you need to value your business from their perspective. Normally, potential buyers will use the Seller’s Discretionary Earnings method or the SDE Method. With the SDE Method, potential buyers will look into the growth potential, market trends and competition relating to your business and its ability to generate revenue.

Another common method adopted by buyers is the multiple method. This is where multiples of a business’s earnings at the relevant time are used for its valuation. Let us say that a business makes about £100,000 as EBIT (Earnings Before Interest and Taxes). The valuation for that business could be determined at 4 times the value of its EBIT viz., £400,000.

Remember that potential buyers will also consider your business’s intangible assets such as goodwill, reputation and intellectual property.

Market Value

Regardless of how business owners have arrived at their business valuation figures, at the end of the day, buyer demand will ultimately determine its sale value.

Regardless of the method of calculation adopted, business owners ought to be prepared to compromise on their business valuation figure, if buyer demand does not meet the price they have landed at.

Understanding economic conditions in your industry and reading between the lines of supply and demand can help you understand the present market conditions. This can help you to arrive at a true valuation figure.

For example, the worldwide pandemic COVID impacted economic conditions, creating a domino effect affecting businesses which in turn drove business values downhill.

Focus on the unique selling points specific to your business. Identify what makes your business different from your competitors to stay ahead. Gather comparable sales to see how other similar businesses are valued. This gives you a crystal clear picture of the best price you could sell your business for, to the right buyer.

Valuing a Business at Different Stages

The age of a business directly influences how the business is valued. For example, valuing an established older business is easier since it already has a track record of earnings, revenue, cash flow, assets, inventories etc.

However, start-ups are valued with a futuristic vision of their potential. Valuing a start-up is not an easy task since it is difficult to predict how a business will turn out when there are lots of external factors that can contribute to its growth.

Valuing a business at various stages of growth can be done easily with the help of an expert. While it is an added expense, the insights that a professional valuation report can offer can outweigh the cost.

Other Business Valuation Tips 

If you are looking to sell your business, you can also speak to an accountant about similar businesses that have been sold in the past. Looking at this information can give you an idea of what your business is worth based on previous sales.

A simple Google search can also help discover the value of other similar businesses – which will help you to determine how much they have sold for previously, and what you may expect to see when selling your business.

If you’re not naturally business-minded – valuing your business can be tricky. It’s important to ensure that your finances are organised, assets and liabilities are accounted for, and that you fully understand the industry that you operate in. A strong business plan is also needed to help you demonstrate the future growth projections of the business. If these tasks don’t come naturally to you, you can seek support from professional business advisors.

Final Thoughts

If you’ve arrived at this page wanting to understand how much your business is worth, you should now be able to understand the key factors that affect the value of your business.

Professional business valuations will give an objective view of the value of the business based on its tangible and intangible assets but the true value of your business will come down to what the buyer is willing to pay you for it in the current market.

Key things that will impact the final valuation include; revenue and profits over time, staff retention, locations, assets, marketing strategies in action, comparable sales to others in your industry and contact lists or suppliers.

Negotiation will likely form a large part of reaching a final business valuation so it’s worth knowing your business’s worth and advocating for it.

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