Whether you’re valuing your business to sell or for investment purposes, in order to arrive at a fair market price, it’s important to be as objective as possible. While there’s no hard-and-fast formula for getting it right, it is possible to use calculations based on standard formulae before tweaking to suit your own specific circumstances.
One of the simplest methods is to add the value of everything the business owns before subtracting debts and liabilities. Consider how much assets like equipment would cost to buy new and factor in depreciation to reflect age and condition. Unless you own a lot of real estate, this approach is likely to fall short of the business’s actual value – which will also depend on historical revenue and predicted earnings – but it’s a good place to start.
A multiple of earnings – or price-to-earnings ratio – is often used to value a successful business as it more accurately bases price on an expectation of income. Multiples vary according to market sector, but usually fall between two and ten times profit levels. Smaller businesses might take the net profit and add back owner expenses (salary, car etc).
Pull together accounts for the past three-to-five years and prepare (or have your accountant prepare) an income statement that details expenses, profits and cash flow plus an asset/liability list. This will allow you – and any potential buyers or investors – to see how the business is growing and will give you the data you need to fine tune your valuation.
Considering tangible assets and business performance is important but the value of your business is also tied up in intangibles such as your brand, staff and customer list. If you have an exclusive distribution deal or trademark, your company may have considerable strategic value to a synergous business looking for a smart acquisition.
If you’ve owned your business for a number of years, your investment will greater than the sum of its parts. But this can cloud your judgement when it comes to value, so make sure you run your figures past a trusted friend or colleague before you go public.
Find out more about valuing a business with the Bizdaq Guide to Valuing Your Business