How to Value Your Business and Understand It’s Worth
‘Valuing a company is an art, not a science!’ This narrative has practically become a mantra in the business world because every business is different.
While there are some conventional ways of working out the worth of a company, their effectiveness and significance vary considerably depending on the individual structure and assets (tangible and intangible) of the enterprise.
The first obstacle to overcome is your emotional bias. You have most likely invested many years of toil into your business, or maybe it has been in the family for generations. Putting a price tag on something you are emotionally attached to is very hard – which is why it is a good idea to call in a professional company when it comes to appraising the worth of a business.
Hire a financial advisor to work out what your business is worth.
Once you have resolved to sell, the buyer’s broker or legal and financial advisors will be helping them find out if your sale price reflects the true value. This ‘due diligence’ procedure is inevitable, and for this reason, it is good always to have an idea of how much the business is worth throughout its life. This is key to understanding when it is the right time to sell and arranging the best price possible.
Comparing what other businesses are going for is worthwhile, but more important is knowing your profit and loss statement.
Once you have decided to sell, the formal appraisal process is generally approached from three distinct angles: assets, income, and the market.
What creates value in a business, beyond assets and liabilities?
The bottom line is the bottom line. Profits beat everything else when it comes to valuation. Assets are of little importance if they don’t drive profits. So it is especially important to know what drives the value, which are likely to be intangibles. It could be the business location, the price, great products, successful vendors, customer mix, the name, website, marketing, etc. Or it could be a mixture of them all, like a great recipe. Leave one ingredient out of a good cake recipe, and it will fail.’
Aside from the usual valuation methods, what gives a business value to a potential buyer?
What would you prefer to own – a decorating firm that makes over £500,000 a year where you get up at 4am, run teams of workers constantly faced with issues like the weather, staff sickness, tardiness, failing equipment, etc….or a delivery business that makes £500,000 annually that is open 9 to 5 Monday to Friday, managed by a small office with a couple of staff, virtually no inventory, and a returning clientele?
The more straightforward it is for a new buyer to acquire the business and maintain the profit stream, the more valuable the business.
Are online business valuators reliable?
At selling-business.co.uk we wouldn’t advise you to rely on a website to inform you what a business should sell for, but then again, a human valuation may not be close either. That is why the saying “business valuation is an art, not a science” is repeated so often. It’s hard to have a computer program produce real art…although there will come a time when it may be possible.
Valuing a business does require an artistic and subjective eye, whatever scientific procedures may have first been applied. But the ‘bottom line’ continues as the same: the easier it is for a purchaser to buy the business and keep making money, the more valuable the business.