Every business owner should have a sound idea of how much their business is worth – whether or not they’re looking to sell.
Establishing an accurate business value is not only essential for raising finance – such as equity capital – but it also creates a handy benchmark if you’re planning to add value in the short or long term. It’s far from an exact science, though – as any expert will attest – so what’s the best approach?
Broadly speaking, your company’s value will depend on a combination of tangibles – such as past performance and assets including buildings and equipment – minus any liabilities, plus a variety of intangibles, including your brand, staff and customer list. Your business status – sole trader or limited company – will also form part of the valuation equation, as will its potential for growth. Make sure you know exactly what you’re valuing before you start.
Begin with your company accounts and take stock of leases and inventory as well as contracts and prospects. It’s common practice to approximate the value of small businesses by adding a ‘goodwill’ payment to the stock at valuation (SAV) figure, although a more accurate figure can usually be calculated using a profit multiplier, which varies according to your business niche and the economic climate. A low-risk, scalable business in a desirable niche will attract a higher multiplier.
Hard-working, loyal staff members bump up the value of any business – especially if you have a well-managed hierarchy that doesn’t depend on one person for its success. If the buoyancy of the business relies heavily on your leadership, for instance, this will reduce its appeal to future buyers. Conversely, a business that can demonstrate a robust infrastructure with sound operational systems will command a better price.
It’s natural to err towards an optimistic valuation when it’s your investment on the line, so ask someone you trust to give you honest feedback on your figures and take a step back to view it objectively – as a prospective buyer might.