How to value your business

Small Business Advice 16 January 2018

There is no single formula that can be used for how to value a business. Any entrepreneur or SME owner knows that there are dozens of complex elements that impact the previous and projected success of a company, which make it difficult to assign a concrete figure to a business’s worth.

And yet, people buy and sell businesses every day.

We’ve outlined some of the main elements that factor into how much your business could be worth, and what you should think about when valuing it.

Why should you value your business?

Knowing how much your business is worth can be useful in a variety of instances, including:

  • If you want to sell it
  • If you’re seeking an investment
  • If you want to trade shares
  • If you want to track its growth and success over time

What determines how much a business’s worth?

If you’re selling your restaurant, for example, you’ll know how much the equipment and premises are worth.  But what about the loyal customers who return regularly and the discounts you’ve negotiated with local produce providers?

When working out how much your business is worth, you’ll need to consider both tangible and intangible factors.

Tangible factors include:

  • Assets (such as property, equipment, and inventory)
  • Historical cash flow
  • Location

Intangible factors include:

  • Customer loyalty
  • Brand reputation
  • Intellectual property (such as patents, trademarks, or copyright)
  • Relationships (with suppliers, collaborators, clients, etc.)
  • Potential growth
  • Staff stability
  • Reason for selling
  • How long the business has existed

Methods for valuing your business

Valuing a business is challenging because each business is different, and certain aspects will have a different worth to different people. For example, a café might be worth more to someone who owns the restaurant next door.

There are several methods that are used when determining how much a business is worth, including:

  • Asset-based valuation

A quick and simple method, you can add up the value of your assets, minus anything you owe, to find out how much your business is worth. Keep in mind, this figure doesn’t reflect the intangible factors associated with your business.

  • P/E ratio method

The P/E ratio will be a number that you can multiply by a business’s post-tax profits to determine its value. For example, a business that has made £100,000 in profit with a P/E ratio of 6 would be worth £600,000.

The difficult part is coming up with the right P/E ratio in the first place. There is no official list of P/E ratios, but you can search for ones that have been assigned to businesses that are similar to yours and use them as a reference point.

  • Predicted cashflow

This method is commonly used for businesses that have established a history of sales. You can forecast future revenue and costs for a set period of time (e.g. 5 years) to determine profit. Then, you can think about the risk and time involved in reaching that figure and deduct an appropriate amount to come up with a final figure.

  • Starting from scratch

Consider how much it would cost to start the same business from scratch, taking into account everything from assets and equipment to recruitment and training costs. This will allow you to come up with a figure that represents where your business currently is, in terms of growth and success, which reflects how much it’s worth.

  • Looking at similar sales

One of the quickest ways to begin valuing your business is to look at how much similar businesses have been bought and sold for. That will give you a general figure, which you can adapt based on your own tangible and intangible factors.

The best valuation method to use will depend on your business. Predicted cashflow might not hold much clout for a new tech start-up, but could give great insight into the worth of a 20-year-old hardware shop. An asset-based valuation could be a viable option for valuing a seaside B&B, but wouldn’t be as useful for someone looking to sell their work-at-home digital marketing business.

 

Often, combining a variety of approaches is the best way to figure out how much your business is worth. Make sure to consult your accountant, as well as other industry experts, for a well-rounded assessment. Explore our blog for more small business advice.

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