What is my business worth? How to value a business
As of 1st June 2016, all business and commercial valuations will be serviced under the trading name of Eddisons Taylors.
There are many reasons why you might choose to value your business. These include if you’re thinking of selling it, need to raise finance, are planning an exit strategy, for insurance purposes or to ensure efficient tax planning. We look at how you can value your business and why it’s so important to get it right.
Although there is no precise formula to business valuation, there are a number of methods which can be used to assess how much your business is worth.
If yours is an established business which has a profitable track record, this method may be suitable for you. If you exclude factors such as one-off purchases and costs, your average annual profits can be ‘normalised’. This figure can then be multiplied by anything between three and ten times, depending on the size of your business, to determine the Price/Earnings (PE) Ratio. So, for example, the PE ratio on a business making a post-tax profit of £100,000, which was up for sale for £500,000, would be 5 – giving a sale price within reasonable expectations of future profits.
If, for example, you are a property developer with a portfolio of assets, this may be the best method for you to use to value your business. The net value of your assets at the current value will be added together (and liabilities deducted) to arrive at a figure which can be used as a valuation price.
For businesses which are more customer-facing, entry valuation, which calculates how much it would cost to set up a similar business, may be the best method for you. Issues to consider are the cost of sourcing and renting or purchasing premises, recruitment and training of staff, developing a product or service and purchasing the necessary assets to build a customer base and establish a reputation.
Discounted Cash Flow
This method may be most appropriate for established businesses which have had considerable investment but have few assets, and can forecast a predictable cashflow into the future. Estimates of future cashflow are made, possibly up to 15 years ahead, and the ‘terminal value’ of your company will also be calculated. These sums are then discounted by between 15 – 25% to take inflation variations into account to arrive at a valuation figure.
Rule of Thumb
The rule of thumb is applicable to businesses which may change hands regularly, such as retail outlets or recruitment agencies. Each industry will have its own rule of thumb but in general a value is arrived at by looking at factors such as multiple of turnover or footfall per retail outlet.
Of course, valuing a business is a delicate and exacting art, and must take into consideration a range of factors including the current and future state of the economy, for example, in order for you to obtain the best possible price. While you may feel that you can capably do it yourself, most business owners prefer to rely on the expertise of business surveyors and valuers who can offer an independent, comprehensive and objective report backed by up-to-the-minute financial information and industry forecasts.
If you’re looking for any further information about valuing your business, talk to a member of the Eddisons team. Our advisors can offer you impartial and professional advice about all aspects of business valuation, amongst many other things.
Written by: David Cran on Wednesday 25/05/2016