You might be considering a business valuation because you are looking to sell your business, or it may be because you’re looking at the businesses financial health, or planning your roadmap to a successful exit strategy with a maximum price.
Whatever your reasons, or knowledge of how to go about valuing your business, we’ve broken down everything you need to know and consider.
Business Valuation Methods
It is often thought that you can value a business based on its turnover, but this isn’t entirely true. Whilst it can often be a factor, there’s many different considerations and methods that can make up an accurate valuation.
These include;
P/E ratio
A business could be valued against its profit to earnings ratio, also referred to as price to earnings ratio. This is mainly used for those businesses that typically have a high profit. It is used to understand at what point an investment, or purchase of a business, would start to make a profit. It is just based upon a multiplication of your net profit. So if your business made a net profit of £100,000, with a P/E ratio of 5 your business would be valued at £500,000.
The value of assets owned by a business
If your business owns a large amount of valuable assets then an asset valuation may be the most suitable method. The valuation is based upon the net book value (NBV) of the assets, which is just the value minus any liabilities.
This mainly covers tangible assets, including; property, vehicles, tools and equipment. However, some intangible assets such as trademarks, accreditations and intellectual property can also support.
Discounted cash flow
Another common method is discounted cash flow, or DCF for short. It is slightly more complex, and based on assumptions rather than hard data but is still a valid method.
It is estimated based upon the businesses future projected cash flow, so is used more frequently for businesses that are larger and more mature. It will also consider the value of the pound (£), so over time £1 will be worth more than £1 by next year.
Entry valuation
An entry valuation is essentially what it would cost to start the business up, or a similar one, again from scratch. This should incorporate all of the assets, products, and other costs for everything from raising the funds to marketing and employee salaries.
You should also think about costs that you would cut back on, so would you save money if you didn’t invest in a website for example. Any savings that you note you can then subtract from the above list of assets, and this is what your entry valuation will look like.
Which method you choose to work with can depend on your business and any third party help you may receive. It’s worth remembering that this level of business valuation is just a guide, and you should seek expert advice for a detailed breakdown and reliable valuation.
How Is A Business Valuation Calculated?
A business can be valued using different methods, which have their own calculations and predictions. You could also use more than one valuation method, detailed above.
However, it’s worth noting that there are many other factors and considerations that will need to be taken into account, both external and internal factors.
In order to get an accurate business valuation, it is recommended to seek a business valuation through an experienced broker.
What Can Affect The Value Of A Business?
No two businesses are the same, and it can only be worth what someone is willing to pay for it. There’s many factors that can affect the value of a business, both positively and negatively. These include;
- The location of the business – two businesses in a town centre may have a very different valuation, if there is another competitor down the road, or they are the only cafe in the area for example.
- The reputation of the business – if the business has a bad reputation this is a challenge for any investor or potential buyer to overcome which could impact its valuation.
- The age of the business – Any start up that hasn’t had a huge amount of investment, in comparison to a well established business is naturally going to have a different value but that isn’t to say that it will hugely hinder the business opportunity for the future so potential buyers will see the opportunity.
- The reason for the business being sold (if it is being sold) – If the business is being sold due to specific circumstances it could potentially impact the valuation. For example if the owners are being forced to sell the business because it is losing them money then it should reflect this in the price. It may be lowered to achieve a quick sale.
- The industry and the services/products that the business offers – The business may offer a unique, innovative solution that is one of its kind and has seen a huge demand which could support a higher value proposition.
- The economy – Of course with a downturn in the economy it can present a risky business decision for any investor or potential buyer. Equally if the business is able to survive and thrive this can be represented too.
When To Get Your Business Valued?
People most commonly look to get their business valued when they are considering selling a business. Whilst this is obviously an important step in the selling process, it is recommended to understand and frequently check the health and valuation of your business on a regular basis. The reason for this is to ensure you are growing your business and seeking maximum value over time.
Other reasons are if you are looking for investment in the business to support future growth. Investors will therefore want to know the value of the business, along with lots more information, to gain a better understanding of the opportunity. Essentially, you need to prove to them that your business deserves and needs the investment and it will be a viable investment that will provide a good return.
Alternatively, you may be looking at exiting the business, either by selling your shares or maybe because you’d like to retire.
Well, quite frankly, you don’t need a reason or a specific time to get your business valued. Sometimes, you’re just interested and want to understand the company’s health, and that is absolutely acceptable.
In fact, as a business owner you should be working towards increasing the value of your business and constantly planning for situations in the future.
Business Valuation Experts
Whilst we’ve broken down the methods, potential reasons and considerations, what works for your business might not be the right way for another business. Hopefully, we have provided you with a good level of information to understand it in much more detail to navigate your way to valuing a business. But it’s likely you’re still just about scratching the surface.
With so many different factors that can make up an accurate business valuation it is strongly advised that you seek the expertise of brokers, like ourselves.
