Do You Really Know the Value of Your Business?

Knowing the value of your business is crucial even when you’re not planning to sell

Knowing the value of your business is crucial even when you’re not planning to sell

Knowing the true value of your business is obviously crucial when you’re getting your business ready for sale…

…but it’s actually just as important to know the value of your business when you’re not planning to sell.

Even if you have a 5 or 10 year plan for your business and a well thought-out exit strategy, statistics indicate that far too many businesses are actually put up for sale when the owner was least expecting it.

Some of the most common trigger points for the sale of a business include health and family issues, sudden changes of circumstance (such as divorce, or breakdown of a business partnership), increased competition, and even opportunity coming knocking in the form of an unexpected takeover offer.

With so many potential business sale scenarios out of your control, it really does makes sense to ensure you always know the true value of your business…

…so your business is always ready to be sold, regardless of what life throws at you.

Your business is probably your biggest asset

Your business is probably your biggest asset

Think about this. If someone asked you what your house was today, you’d most likely be able to accurately guess it’s value, give or take $50-$100K.

But would you be able to do the same with your business? Well, if you’re like 75% of business owners you probably have no idea of its current value, and even worse…85% of all business owners have no exit strategy whatsoever.

Your business is not only likely to be worth a lot more than your house, but more often than not your retirement plans are probably based on an ultimate sale.

When people are getting their house ready for sale they finally finish off all those tasks they’ve been meaning to do for years. Then, how often do they say, “Oh, why I am selling? The house looks so good now!”

And it’s the same with your business. The process of getting it valued ensures you have it running to the best of its ability all of the time. So if you get it valued now, you can enjoy the benefits before you decide to sell.

You never know when opportunity may come knocking

You never know when opportunity may come knocking

Even if you weren’t planning on selling your home you’d probably reconsider if someone popped a note in your letterbox and offered you a great price. It’s the same with your business…having a current valuation means you’re always ready to sell if opportunity does come knocking and you suddenly receive an unexpected offer of your business.

A current valuation also gives you the advantage of speed, so you’ll know immediately whether any offer is a viable option or not.

Also, unexpected buyers who approach you are often after a quick sale, so if you have to delay the sale in order get your business valued first, the offer to buy may no longer be there.

Regular valuations are a must

Regular valuations are a must

Just as house prices fluctuate when interest rates and market conditions change, the value of your business will vary for both reasons within your control (how you manage your cash flow, investments, clients, suppliers and staff) as well as reasons out of your control (the economy at large, other competitors, and environmental factors).

At at minimum, you should reassess what your business is worth at least annually. After all, a business valuation can also help you spot and fix any future problems, ensuring your business is always running optimally.

So how do you estimate the value of your business?

Because you probably have a lot of emotional investment in your business it can be hard to make a true assessment of its worth without independent and professional advice.

An experienced business broker will most likely use one (or a combination of) these four most commonly used valuation methods.

Earnings multiple

To calculate the earnings multiple you simply take your business’s annual EBIT (earnings before interest and tax) and multiply that amount by a selected multiple.

The multiple will vary according on the industry you’re in and the growth potential of your business, and your business broker can advise you on the best multiple for your business.

Multiples can vary from as little as one year’s EBIT for service-based business, where as established business with sustainable profits can sell for as much as six times their EBIT.

Comparable sales

Sale prices achieved for similar businesses can provide a real insight into the true market value of your business, but bear in mind every business has its own set of of intangible assets which will impact the final sale price achieved.

You can research business-for-sale listings in industry magazines, newspapers or websites, and also ask other brokers what they think your business is worth or what price they have sold similar businesses for.

Asset valuation method

This method of valuation calculates the total value of your business’s physical assets (cash, stock, plant and equipment and receivables) and then subtracts all of your liabilities (any bank debts and payments owed).

The asset valuation is based on what your business would be worth if it were sold today, and it doesn’t take into account any goodwill, or the ability of those assets to generate wealth in the future. If your business is underperforming and has no goodwill, then the check asset valuation method may be an accurate way to value it.

On the other hand, if your business is a retail or service-based business, your ‘goodwill’ is the difference between the value of your net assets and the true value of a business, and using the asset valuation method alone may understate the true value of your business.

Bear in mind that any goodwill you have may not be transferable, since it comes from physical features like location, and personal factors, like the your reputation or relationships with your customers or suppliers.

Capitalised future earnings / return on investment

When you sell your business, you’re not only selling its assets…you’re also selling the right to any future profits the business might generate.

This is why estimating any capitalised future earnings is the most common method potential buyers use to value small businesses, as it provides them with an indication of the rate of return on investment (ROI) they can expect to receive from a business compared to other methods of investing their money.

To calculate capitalised future earnings buyers will take the average net profit of your business over the last three years (using your profit-and-loss statements) and divide that number by the expected rate of return they are looking for. The rate of return they are looking for could be as low as 5% or as high as 25%, depending on the level of risk they are comfortable with.

Once potential buyers have divided your net profits by the expected rate of return, they will then multiply that figure by 100 to calculate the capitalised earnings valuation of your business. This figure is basically what they think your business is worth, based on the rate of return they think it will generate.

Who can you talk to about your business valuation?

Who can you talk to about your business valuation?

Online research is a great place to begin to give you a rough idea of what sort of money similar businesses for sale are asking for. However, because business sales involve a lot of intangible assets online research will only provide you with a guide to pricing point, rather than what the businesses actually sold for, which is the true value of any business.

Your accountant will probably take a profits-based approach to valuing your business, reviewing your last few years financials to decide on a price for your business.

And although accountants have considerable expertise in the tax implications of a business sale, your actual business value may be considerably greater than their profits-based estimation once you take into account goodwill, your investment in your business, and its potential and uniqueness.

Business brokers are the obvious choice to give you an educated guess on what your business is worth and if they are a local broker, they will usually know how business sales are going in your area and can estimate how long it will take to sell.

A proactive business broker who uses digital storytelling to communicate the value of all your hard work making sure your opportunity is seen by the widest possible audience of potential buyers will give your business the best chance of standing out from the rest…

… and the better you tell your story, and the more people you tell it to, the more you can get for your business.

Because at the end of the day, your business is of course ultimately only worth what someone is willing to pay for it.