Business Valuations – What do you need to understand for your business?

November 10th 2023 | Posted by phil scott

Why is it important to value your business?

If you are a small business owner who is looking to grow your business through investment or a business owner looking to sell, it’s essential to understand the concept of business valuations.

Whether you are looking to sell a portion to an investor or sell as a whole, valuing your business is essential, as it will identify the market value, giving a starting point for negotiations to achieve the best deal possible.

What’s important to remember?

It’s crucial to understand that selling a business follows the same rationale as selling any other entity – the final sale price reflects market value.  A business is only worth what the market says it is.  Always remember that while a business valuation provides critical information, the ultimate sale price is determined by what the purchaser is willing to spend.

How can I value my business?

When it comes to working out the value of a business, there are various approaches that can be used.

A simple way is looking at what it would cost to set up a similar business from the beginning.  The entry cost of setting up will shape the market value of buying a ready-made business.

Another straightforward approach is to value the assets of the business.  However, this is mostly suited to businesses with tangible assets and is less suitable for businesses basing their sale value on goodwill, reputation and relationships.

Many businesses work out their value by the concept of earnings multiples.  This is calculated by multiplying annual profit by an accepted multiples number for the relevant industry and business size. As well as this, a multiples calculation can be done on predicted future growth to arrive at a final value figure.

Also, when businesses are bought and sold frequently in a sector, the industry rate for that type and size of company is easier to establish, as there is sale history to use as a benchmark.

What influences business value?

Working out the value of a business is not as simple as just using the various methods available.  Business value can be positively or negatively impacted by many different factors:

Positive impact:

  • Unique selling points such as distinctive products, exceptional staff or excellent reputation
  • Age of the business, where more established businesses can demonstrate sustained profit
  • A positive overall economic environment
  • The motivation of a buyer for a quick purchase
  • The motivation of a seller to hold out for the highest achievable price
  • Excellent commercial opportunities for the business
  • Exceptional growth potential

Negative impact:

  • The financing needs of the buyer
  • The necessity of the seller for a quick sale
  • Newer businesses, which have less history of profit
  • Businesses which appear to be a risk
  • An industry and economic environment where sale prices are not doing well

Getting it right for you and your business

It’s clear that no business transaction operates in a silo.  There are wide range of external factors that influence the sale value of a business and many ways to approach working out a sale figure.

Getting professional advice from an accountant or business adviser will help you properly value your business as market knowledge, expertise and experience are essential.