How to value your business
5 min read
03 April 2018
Most prospective buyers will expect you to name your price, even if only as a starting point for negotiations.
What is your business worth?
There are three common ways to value a business, based on assets, business income and market value.
And whichever method is chosen, there are often many ways to increase the value of your business if you are keen to sell.
So, here’s an overview of some possible options:
The asset-based approach
Every company has its own assets and liabilities.
One straightforward way to discover the worth of a business is to add up your assets and subtract the liabilities.
The difference will give you your asset-based valuation.
Although this doesn’t seem complex, you must understand what assets and liabilities you should include, find out the best methods of measuring each asset class, to then reach a fair market value.
Because this approach focuses on physical assets, property renovations can be a great way to increase the eventual value of your business premises.
The same can be said for upgrading machinery, furniture or other fixtures and fittings in order to reap the benefit later on when you list your business for sale.
In the instance where some or most of your equipment is leased, investing in purchasing select equipment with low maintenance costs, can have a substantial effect on your business valuation.
The income-based approach
Applying the income-based approach involves looking at what every entrepreneur considers the “bottom line”.
These are the numbers that prospective buyers have the most interest in – the profits.
Bear in mind that this method uses projections of future business income – usually over a fixed number of years. And because this income is anticipated, but not necessarily guaranteed, the risk is factored into the calculation.
The worth of your business then comes down to the sum of these discounted future cash flows.
An alternative to this is taking your annual business earnings, and then applying an industry accepted multiplier to produce your valuation figure.
If this becomes your chosen valuation method, then maximising your present (and future) business income prospects is the best way to increase your business valuation.
In this case it should be a serious consideration to repay any kind of debt to reduce your outgoings.
To increase your profits, you must of course reduce your outgoings to get the highest valuation possible; much like balancing scales.
Other measures can include cost-effective actions such as renegotiating deals with your suppliers during your preparation to sell – this will then positively impact your profits and further tip the scale in your direction.
The market-based approach
This approach compares your business with the prices other companies of a similar size are fetching in today’s marketplace.
This type of “no-nonsense” valuation can make buyers feel more confident about making a purchase, whilst also reassuring sellers about the prospects of securing a deal on par with the rest of the sector.
This going-rate method relies on accurate market data. In reality this often leaves buyers and sellers haggling over the amount they each think the business is actually worth.
There is also the danger that short-term market volatility may utterly fail to reflect the true longer-term value of a well-run business with a good track record.
Some relatively new business concepts might also fare badly if there is little data on the sales and early markets in their industry.
Unlike the other methods, a market-based valuation alone won’t be enough to help you formulate strategies to boost your future selling price.
It will however, identify some real-life exemplars of what can be achieved, that you can emulate by using an asset (improving with renovations) or income-based approach (tipping the scales).
Benchmarking your current business valuation is a wise move if you are planning a sale further down the line.
As well as offering you some valuable feedback about your current position, provided you are prepared to engage with the detail of these three valuation approaches, you will also be able to put strategies in place to maximise your valuation figure when you finally decide to bring your business to the market.