Whether you have an established business or a brand new one, the process of valuing your business can be a daunting task. After all, every business is different. To support you in your valuation journey and provide some clarity, we’ll run through some important points to consider before and during your valuation.
Understanding the purpose of the valuation is an important starting point. Depending on the purpose, certain factors may be more relevant than others. Having a clear idea of the specifics of your business and the purpose will help calculate an accurate valuation.
The first thing to consider is financial performance. This can be calculated based on earnings before interest, taxes, depreciation, and amortization. This overall calculation can be useful whether buying or selling a business as it measures the profitability but also includes short-term and long-term debts, common shares and equity.
Another way business owners can calculate the value of their business is with Seller’s Discretionary Earnings. This is the total financial benefit a single full-time owner-operator would get from a business on a yearly basis. Or in other words, the amount of money the new owner could take out of the business each year.
Assets and liabilities
Another key metric to get a clear indication of business value is your assets and liabilities. Assets are anything that adds value to your business. There are two different types of assets: tangible and intangible. Tangible assets are things like property, equipment, any stock or inventory, and cash on hand. Intangible assets are your non-material assets like patents, copyrights, trademarks, intellectual property, customer base, brand, or reputation.
Your liabilities are any debt or outstanding credit your business has. You can look at assets as adding and liabilities as detracting from the business’ value. Liabilities that may affect your value could be any accounts payable, business loans, debts, or expenses.
One of the ways to work out value is through the Adjusted Net Asset Method. This works by calculating the difference between the business’ assets both tangible and intangible, and its liabilities. This calculation can be particularly useful for keeping a track of spending and resources.
Although we have already touched on intangible assets it is important to emphasize value they can bring a business. Due to intangibles assets being non-material assets, they can be tricky to put a price on. Intellectual property, probably the most well-known intangible asset, can be defined as creations of the mind, which can be difficult to compare to other similar intellectual property.
Similarly, a business’ reputation can be difficult to value. We know that a good reputation can positively impact businesses, adding value to your business, and in turn, that will attract buyers or investors. A business reputation can be built on lots of different elements, but things like reliability and integrity can go a long way in determining a business’ success.
When we tend to think of business value, we often jump straight to the financials as we need to ensure a business has monetary value. The people-side of a business is also a crucial consideration. Factors that may be considered are the size of the company, how many people work at the business, and in what capacity.
How the business’ staff and its management are structured will also determine how the business is run. Will the new owner be able to leave the current management in place or will they need to be involved with the day-to-day management? The type of owner involvement, as well as the staff members’ costs and needs, are important considerations in a business valuation.
The market your business is operating in can be crucial factor, whether it is an established market with stability like the industrial chemical industry or an up-and-coming one like the Web 3.0 blockchain market. Is the market seeing a lot of growth and opportunity? An understanding of the industry’s trends can help people make an informed valuation of a business, which reflects not only the business’ assets but also considers the value of the current market.
Comparing the sales and purchases of other businesses in the same market can help determine an appropriate selling price and can be particularly useful for rapidly growing businesses and industries. Using comparables can also demonstrate what makes your business special or unique.
It goes without saying that at first thought valuing your business can seem like a big task, as well as, making sure your business is valued at the right price. You can use these tips as a starting point on your valuation journey. If you need further support, the BusinessesForSale.com free self-service valuation tool, ValueRight, can also help. The tool uses 20 years of data to correctly benchmark and value your business. For the most accurate, personalised business valuation, try to provide as much information as possible. The process will take about 45 minutes and upon completion you will get a downloadable PDF report for your records or to show to potential buyers.