What’s your business worth?
When you are thinking about selling your business, the most important question and often the most overwhelming question is – how much is my business worth? Calculating a business’s value isn’t as simple as using a universal formula that reveals a precise value, and often the seller will want a higher price, while buyers want the lowest one possible. There are key methods to use and factors to take into consideration that will allow you to find an accurate value for your business.
Popular methods
Earnings multiples
This is a common business valuation method, especially suited to businesses with an established financial history. This method involves the price/earnings ratio that represents the value of a business divided by the profits after tax. This is a fairly simple equation, but it is important to note that there isn’t a standard P/E figure that can be used for valuing every business.
Entry cost
This method uses the predicted costs that it would take to set up a similar business, including the costs of developing a customer base, reputation, recruitment, staff training, buying assets and developing the products and services.
Asset valuation
This is the ideal method for established companies with many tangible assets, such as property companies. This method works by calculating the net realisable value of all the business’ assets.
Other considerations
The economic climate
Economic climates often affect the value of a business. For instance, if the economy is on a downturn it will make buyers more cautious to buy a business. When the economy is good, many companies decide to grow and invest in new firms and finance is better available for them to do so. Sellers are more likely to receive a higher price when the economy is doing well.
Fixed assets
Usually, fixed assets are valued with their original purchase prices and depreciation calculations. However, exceptions arise with assets like property that can rise in price as time goes on.
Reason for sale
The circumstances of the sale may affect the price buyers and sellers eventually settle on. When sales are forced, valuation methods can often be discounted in order to achieve a sale quicker.
For those considering selling their business, it is worth being aware of all the factors involved in a business’s value before going ahead with putting it on the market.