How to value a business

Businesses can be one of the most difficult assets to value. You’ve put your heart and soul into building your business from the ground up, investing time, money, and energy, but how does that translate into pounds and pence? 

It may be that you’ve already made the decision to sell your business, and are now ready to get it listed on the market, or it may be that the figure that comes back from your valuation will be a deciding factor in whether or not you choose to sell up. Whatever the reason for seeking advice, here’s our guide on how to value your business. 

Where to start with a business valuation

When it comes to valuing your business, the best starting point you can adopt is to know exactly what it is that you’re going to be selling.

This could equate to the name of your business and the reputation it holds sometimes known as ‘goodwill’, or a lease on a company premises that you currently own. 

Other aspects that should be taken into account in these early stages include: 

• The type of business you’re selling 
• The sector you operate within 
• Any additional business assets you currently hold 
• The staff you employ
• Compiling accurate profit and loss figures and accounts 

All of the above will contribute to your business’s overall value and how it appeals to potential buyers. Taking a comprehensive approach in the earliest stages of the selling process, considering every aspect of your business and what it might be worth, will help you to achieve an accurate valuation, and therefore be able to market your business appropriately and to the right buyers.  

What is my business worth? 

There are a number of key considerations that need to be taken into account when it comes to determining the value of your business… 

Assets and liabilities 

Consider the assets your business currently holds, and don’t forget to look ahead a little as well. Does it look like the next 6-12 months are going to be busy for your business? Have you already got orders/bookings coming in? If your order book is already full, this is likely to make your business more appealing to potential buyers. 

It’s also important to be transparent about any debts or other liabilities the business has. 

Years in business  

The age of your business will always be considered by potential buyers when they’re making their decision on whether or not to invest. A new business start-up usually offers a great deal of potential, but there’s also a greater element of risk involved, and a buyer will need to expect to potentially make losses in the first few years. A more established business is likely to already be making profit, and therefore will be a less risky investment in the eyes of buyers. 

Personal circumstances 

Are circumstances in your personal life putting you under pressure to sell your business quickly? It may be that you’ve recently experienced a big life event – childbirth, marriage, divorce, the death of a business partner or loved one – and found that this is driving change in your life. Other personal circumstances, such as increasing stress or ill health, may equally play their part in bringing you to the decision to sell, and if time is of the essence, as it usually is in such circumstances, it may be that you need to settle for a lower offer. 

Financial position 

Potential investors will want to have a full understanding of what it is they’re getting involved with, so it helps to have certain financial documents prepared to help fill them in with the big picture. Do you have historical and current cash flow records, and projections for future profit? How well do you control costs? These factors all play a big part in landing on the final figure. 

Market demand 

How is the condition of the market currently? No matter the sector you’re in, current market conditions will always affect the value of your business, and if you’re able to show that your products or services are still relevant and in demand, this will stand you in good stead for achieving your desired asking price. 

Reputation 

Does your business have an established client base and a good reputation for offering quality products or services? If you’ve worked hard to build your brand and establish trust with your customers, this is likely to be reflected in the valuation of your business.

Employee relationships 

Staff turnover is linked with the reputation aspect of your business. When you take staff on, do they tend to stick around? Do you have any bonuses or reward systems in place for your employees? Do you think they would be likely to recommend you as an employer? Good staff retention means that your business is built and continues to operate on an established level of experience, which will be very appealing to potential buyers, particularly if they’re going to be working with the team you’ve built once the business is taken over.  

How to value a business: Business valuation methods 

Once you’ve gathered all of the relevant information together, you can then move on to the more technical stages of getting your business valued. 

There are five main methods of calculating the value of a business. Most people will use a combination of two or more methods to reach a final figure, and the method(s) that are most appropriate for your business will be dependent on a few factors, such as the sector you operate within, the size of your business, and how long you’ve been going. 

Valuations based on assets 

For established businesses, the chosen valuation method is usually one that takes into account business assets, so the final valuation figure will be based on the tangible assets owned by the business, minus any debts or liabilities. This method is a good option for those who have a stable business with physical assets that have a measurable value, such as machinery and equipment, furniture, land, etc. 

Valuing intangible assets 

Intangible assets, by their nature, can be much more difficult to place a value on. This label will cover everything from intellectual property (like patents, copyrights and trademarks) to the skills and experience of your workforce, relationships with customers and suppliers, and the strength and loyalty of your team members. 

The discounted cash flow method

Whilst it has become trickier to execute since the pandemic, the discounted cash flow method is still a method used in the valuation process. Essentially, the method involves forecasting the next few years of the business’s profits to work out what the cash flow is worth today. The overall value of the business is then worked out at a discounted rate, taking into account any potential risks to the business or industry, and the decreasing value of money over time.   

The entry cost valuation 

The entry cost valuation method sees a business’s value calculated by estimating how much it would cost to launch a similar business as a start-up. This method will factor in the cost of everything it would take to launch the business, including raising finance, buying assets, developing products, employing and training staff, and building a customer base. Any potential savings should also be factored into the equation, so if it would be possible to save money in your hypothetical start-up by adopting more advanced technology, using cheaper materials, or basing the business in a less expensive geographic area, this should all be taken into consideration. 

Valuations based on the price-to-earnings (p/e) ratio 

The price-to-earnings ratio valuation method is usually adopted when calculating the value of businesses with an established track record of making profits. This method sees a company valued by measuring its current share price relative to its earnings per share. If your company has a high forecast profit growth or a good record of repeat earnings, the p/e ratio is likely to be higher, meaning a higher valuation overall for the business.  

Ready to get things started? Get expert advice on selling your business with Pearson Ferrier. 

Established in 1996, Pearson Ferrier is proud to employ a dedicated team of passionate property professionals, who have each worked hard over the years to make the company what it is today – one of the best and highest regarded estate agents in the North West. 

Get in touch with our team today!