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What formulae are used to value a business?


Setting the right asking price can be one of the trickiest aspects of any business sale. Ask too much and you’ll not only put buyers off but there’s a fair chance you’ll have to discount the price a few months down the line. Under-call your hand, though, and you could miss out on much-needed profits. 

Brokers use a range of standard valuation techniques, the most basic being a simple comparison with sale prices recently achieved by other similar businesses. Every industry will have its own rule of thumb for valuations – while most retail operations will be valued as a multiple of turnover, the worth of an online business may well come down to the amount of traffic it generates. 

It’s important to remember that there’s no hard-and-fast formula for getting it right – your business will be worth as just as much as a buyer is willing to pay for it. 
Multiple of profits

Sometimes referred to as a price/earnings ratio, this tried-and-tested method calculates a business’s value based on its profitability. To obtain a value, a sector-specific profit multiplier is applied to your annual adjusted net profit. So, if your business generates £40,000 profit before tax, a 4x multiplier would result in a figure of £160,000, giving a buyer a 25% return on their investment each year. The multiplier may be adjusted up or down according to risk and, as a rule, small businesses usually have lower multipliers than big ones.

Asset valuation

This is a basic method that assesses value as the sum of a business’s assets, minus its liabilities, with other factors – such as depreciation and appreciation – taken into account. It’s more likely to be applied in those sales where the assets are likely to be significant – if buildings and equipment form a big part of the sale, for instance – and where a multiple-of-profits approach may fall short.

Entry valuation

A prospective buyer may well perform their own ‘entry’ valuation – especially if they’re weighing up the benefits of acquiring your business, in preference to starting their own from scratch. This type of valuation assesses the anticipated cost of establishing a similar business – leasing premises, recruiting staff and developing a customer base. From a seller’s perspective, it’s worth considering this approach so you can promote those things that make your business stand out.