The question, “How much is my business worth?” is a question commonly asked by business owners looking to sell. Whether it is to retire or to fund your next business venture, when it comes to selling your business, you want to ensure that you are getting the best price on the market. Determining your business’s value can be a difficult process, however, as many factors contribute to establishing how much it is worth.
In this article, we will walk you through the steps on how to value your business and hit on an accurate selling price. We will discuss why this information is so important, how to go about finding the right value for your company, and other factors that may affect your business’s value.
What is a Business Valuation?
Conducting a business valuation is the process of calculating the economic value of a business and, crucially, figuring out what potential buyers are looking for and are willing to pay. A business valuation report will outline what your business is worth in the current market, and this number can be used as a starting point for negotiating a sale price with buyers.
Why do People Sell Businesses?
A business owner may want to sell for a multitude of reasons – these may be professional, personal, or financial. Some of the most common reasons to sell include:
- To retire: If you have built a successful business, you may want to sell it so you can retire.
- To cash out: If you need money, you may want to sell your business so you can get a lump sum of cash.
- To focus on other businesses: If you have multiple businesses, you may want to sell one so you can focus on the others.
- To downsize: If your business is struggling, you may want to sell it so you can downsize.
No matter your reason for selling, it is always advisable that you spend time determining an accurate valuation so you don’t miss out on potential profits.
Why is it Important to Know your Business’s Value?
If you are selling a business, you of course want to ensure that you get the best price. There are many factors that can impact the value of your business, and being aware of them will help to guide you when it comes to valuation. Attempting to negotiate a deal without prior understanding of your business’s value is a risky position to be in and may see you lose money.
Not only that but if you are looking to secure funding or investment, banks and other financial institutions will want to see a valuation report before they agree to provide any money. For example, if you are looking to take out a loan or investment, the lender will want to know your business’s value and will use this information to determine how much they are willing to lend you. If you do not have a good knowledge of your business’s value, you may not be able to get the financing you need.
Another reason it is important to know your business’s value is for tax purposes. The government will tax your business based on its value. If you do not have a solid understanding of this, you may end up paying more in taxes than you should.
It is a good idea to conduct a business valuation on a regular basis, even if you are not looking to sell or receive funding, as putting together a valuation report is a great way to identify your company’s strengths, as well as areas that can be improved.
What Factors Affect Business Value?
There are many factors that can affect the value of your business. Some of these factors include:
Why you are selling the business
If you are selling because you are retiring, looking to move on to something else, or want a quick sell, the value of your business may decrease. This is because the new owner will have to invest time and money into building up the business. On the other hand, if you are selling because you have built a successful business and are looking to cash out, the value of your business will be much higher.
The age of the business
A newer business will typically be worth less than an established business. This is because a new business has yet to prove itself, while an established business will have a track record of success.
Tangible vs. Intangible assets
A business with tangible assets, such as property or inventory, will typically be worth more than a business with intangible assets, such as a customer list or goodwill. This is because tangible assets can be sold separately from the business, while intangible assets are more difficult to value.
Liabilities
It is important to be frank about any debt or other liabilities that your business has as this will also impact its value.
The industry
Some industries are more profitable than others, which will affect the value of your business. For example, a business in the tech industry will typically be worth more than a business in the retail industry. This is because the tech industry is growing at a faster rate and is generally more profitable.
Market demand
Showing there is a demand for your services or products will, of course, prove very attractive to potential buyers.
Location
Where your business is located will have a huge impact on the value.
Other Things to Consider when Valuing a Business
When determining a valuation, you should also consider the following aspects of your business:
- Relationships with key suppliers and customers. If your business has strong relationships with key suppliers and customers, this can increase its value. This is because these relationships provide stability and growth potential.
- Stability in key management positions. If your business has stable management, this can also increase its value. This is because stability indicates that the business is well-run and is less likely to experience turnover.
- Stability in staff. The importance of staff retention is also notable – high retention rates will reflect in the business’s reputation.
How to Value a Business
There are a few different ways to value a business. The most common methods are:
- Value of assets. This method values the business based on the fair market value of its assets. This includes both tangible and intangible assets.
- Price-earnings ratio. This method values the business based on its earnings and is calculated by dividing the price of the business by its earnings.
- Start-up costs. This method values the business based on the amount of money it would cost to invest in a similar start-up, including start-up fees, recruitment, assets, product development, and marketing.
- Discounted cash flow. This method values the business based on its future cash flows. This is done by discounting the cash flows at a rate that reflects the risk of the business.
- Industry rules of thumb. Another way to value a business is by using industry rules of thumb. This method uses general guidelines to value a business based on its industry. For example, businesses in the tech industry are typically valued at four times their annual revenue.
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
Attracting potential buyers or investors will require you to take a close look at what they want to know. Typically, they will use the SDE method which stands for seller’s discretionary earnings. This means they will look at your business’s ability to generate cash flow and will also consider other factors such as the size of the market, growth potential, and competitive landscape.
The multiple method is another commonly used practice that uses a multiple of the business’s earnings to determine its value. For example, if a business has an earning before interest and taxes (EBIT) of £100,000 and is in a growth industry, it could be valued at four times its EBIT which would give it a value of £400,000.
It’s important to note that buyers will also consider the value of your business’s intangible assets such as its brand, reputation, and intellectual property.
Market Value
A business is really only worth what the market demands – no matter how much you think it’s valued at. Despite doing the calculations correctly, you may need to compromise if the market does not support your figures.
To gain better clarity on your business’s market value, you should determine the current market conditions, and this includes understanding the supply and demand in your industry as well as the overall economic conditions. For example, COVID had a great impact on economic conditions, and many businesses were affected, resulting in a decrease in value.
Understanding your business’s unique selling points, including the things that set your business apart from others in the industry, will set you aside from the competition. You can also look at comparable sales to see how other businesses in your industry have been valued. This will give you a good indication of what buyers are currently willing to pay for businesses like yours.
Valuing a Business at Different Stages
Naturally, it is easier to value an established older business than it is to value a start-up. This is because an established business will have a track record of earnings, revenue, and cash flow. Start-ups, on the other hand, are valued based on their potential, however, they are also dealing with start-up costs and it can be difficult to predict how successful the business will become.
If you would like to value your business at different stages of growth, it would be beneficial to speak to an expert. While this may be a more costly option, the professional and strategic insights you gain may prove invaluable.
Other Valuation Tip
Seeking professional advice is the best way to value your business, as valuation experts can provide you with an accurate estimate of your business’s worth. They will consider all of the factors mentioned above, draw comparisons with other businesses in your field, and use their experience to arrive at a fair value.
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 be helpful in discovering the value of other similar businesses – searching online may give you an idea of what other businesses are worth, how much they have sold for previously, and what you may expect to see when selling your business.
Conducting a valuation is a great opportunity to evaluate your business’s potential, but for some who are not naturally business-minded, this can be a tricky process. It is crucial that you ensure your finances are organised, take stock of your assets, research your industry, and build a strong business plan and business model in order to demonstrate accurate projections for future growth.
How to Get the Best Price for a Business
There are a few things you can do to get the best price for your business, and these include:
- Shop around: There are a lot of buyers out there, so you should shop around to get the best price.
- Be prepared to negotiate: Being prepared to negotiate with buyers means you will be able to get the best price for your business and the buyer can get a good deal too.
- Know your worth: It is important to know how much your business is worth so you can get the best price for it.
Final Thoughts
Knowing your business’s value is important for a variety of reasons. It can help you make informed decisions about selling your business, ensure you get the best price when you do sell, or help with financing, taxes, and future growth. We hope this article has helped to answer the question, “How much is my business worth?” so you can get the best possible price when it comes time to sell.
