What’s my business worth?

What’s my business worth?

Putting a price on your business for sale can be very challenging, especially because what you think your business is worth and what potential buyers think your business is worth are usually two quite different figures!

This is where the expertise of a professional business broker can be invaluable. Providing you with a neutral and unbiased perspective can help you set the right price when selling.

So, whether you’re planning to sell your business soon or simply curious about what your business is worth… here’s a simple guide to how to value your business.

Understand the criteria that will affect the value of your business

Understand the criteria that will affect the value of your business

When you approach a business broker to value your business there are several possible criteria they will take into consideration when valuing your business.

Your reasons for selling your business

If you decide to list your business for sale when you are pushed by circumstances, rather than choosing the time that will increase the chances of achieving the best possible price, this will affect its value.

Businesses listed at the worst possible times, and for the wrong reasons, include when you’re sick and tired of running the business, when the profitability is decreasing, or when you’re sick or ready to retire.

If you’re selling for any of these reasons it’s considered a forced sale and it will drive down the value of your business and make it harder for your broker to negotiate for longer to achieve a higher price.

Whether your assets are tangible or intangible

If your business owns tangible assets (such as property, machinery or stock-in-hand) these will have resale value for the buyer and they make your business easier to value.

However, your intangible assets (your industry reputation, customer loyalty, intellectual property and potential for expansion/diversification) are harder to actually value.

And because many of your potential buyers may be investors who are simply looking for proven return on their investment dollar, intangible assets are not usually included in their calculations.

How long you have been in business and key relationships with customers and suppliers

The longer your business has been operating, the better your track record in the eyes of potential purchasers.

A long history of trading also proves consistency of cash flow and delivers a loyal client base who will provide repeat business for the incoming owners.

The stability of your management and key staff

If you have a strong management team that can run your business for the new owner, your business will be more attractive and more valuable than if your business’s success depends on you or key people who will leave when you sell the business.

The different ways your business broker can value your business

The different ways your business broker can value your business

Your emotional investment in your business can make it difficult to make an unbiased and realistic assessment of its value, which is why the independent and professional advice of an experienced business broker is so important in valuing your business.

Your business broker will use one or more of these valuation methods, depending on the size of your business, the industry you are in and the type of buyer you are trying to attract.

Earnings multiple valuation method

To calculate the earnings multiple of your business, your broker will multiply your business’s annual EBIT (earnings before interest and tax) by a selected multiple.

The multiple they select will depend upon on the industry you’re in and the growth potential of your business and your business broker will advise you on the best multiple for your business.

Comparable sales method

Your broker will look at sale prices achieved for similar businesses, which can provide a good guide to the current market value of your business.

Asset valuation method

This relatively simple 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 potential for growth and expansion.

Capitalised future earnings / return on investment

Capitalised future earnings are the most common method potential buyers use to value small businesses, because it takes into account both your assets and any future profits your business might generate.

Capitalised future earnings also provide buyers 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.

Potential buyers will divide your net profits by the expected rate of return they are looking for and then multiply that figure by 100.

Wondering what your business is worth?

Wondering what your business is worth?

Your business broker has the market knowledge and experience to know the best way to value your business and to help you decide the price when selling your business.

However, the worth of your business to any buyer will be a balance between how much profit it can generate and the risks involved…

…and when it comes down to the final negotiations between you and the buyer the true value of your business is only what the buyer is willing to pay for it.

Maximise your chance of a successful business sale by engaging the services of an experienced business broker who can really help you understand what your business is worth.

Find out more.