What’s your business worth? – part 1

As one accountant admirably put it, “there are not two certainties in life but three: death, taxes and the valuation is wrong”.

Businesses, like cars, horses and anything else you care to mention, are worth what someone is prepared to pay. And the bad news is that all businesses are unique, so any overly simplistic valuation method is going to be, at the very least, unreliable. The good news is that with uncertainty lies opportunity.

Having bought and sold businesses myself, and interviewed a range of commercial lawyers, accountants and business brokers on the subject, what follows represents four of the key “get rights” when considering how to maximize the value of your business:Don’t just accept a simplistic “multiples” approachBy far the most common method of valuing a privately owned business (plc’s are a little different) is to apply the “multiples” approach. At its simplest level, this involves annual post-tax profits being multiplied by a set figure to arrive at a final price. Many accountants, lawyers and business brokers will use this as their primary valuation tool.

An example:

Post-tax profits: £200,000Multiplier: Six timesBusiness value: 6 x £200,000 = £1,200,000

Unless your business is unusual in some way (for example, having very significant property or other capital assets), most professional advisers will suggest the multiples approach is used.

There is a flaw, however. Where did the number six come from? I made it up – which is exactly what professional advisers may do when you ask them to help value your business. And if I had picked the number seven instead, you might consider yourself to be £200,000 richer.

And this isn’t the only issue. You might believe that post-tax profits are reasonably fixed, but this is often not the case. There are many things that can be done to (legally and sensibly) increase the net profit figure. Getting either multiplier or profit figures wrong can seriously affect your wealth.

So, while the multiples method might make a reasonable rule of thumb, what other factors ought to be considered?

Be intangibleFor much of the 20th century, tangible assets were the key determinant of a businesses value. Own lots of factories, warehouses and stock, and you were rich.

But in the modern era, things aren’t quite so straightforward. The real value in many businesses lies in intangible factors: data, design, creativity, innovative solutions, how customer relationships are managed – all of these can combine to make an enormous impact on the value of your business.

If you need convincing of this fact, check out the market capitalisation of Google, then compare the figure with either its assets or current net profit levels. You may be surprised by the results.

The most valuable modern-day assets are found in our heads, not our factories. You don’t have to be a leading-edge technology-driven business to maximise value. There are many ways to manipulate and profit from the know-how in your business – however modest its size, and whatever your industry sector. The problem is, no one really knows how to value intangibles – and buyers, in particular, can be reluctant to pay top dollar. The solution lies in making your business “investment ready”.

Keen to know more about what your business is worth? Read Part 2 here.

Andrew Heslop is the author of How to Value and Sell Your Business, published by Kogan Page and recommended by the Institute of Directors. www.kogan-page.co.uk. Contact Andrew at andrew.heslop@virgin.net.

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