Valuing your business – how much is it worth?

When it comes to selling a business, one of the most important questions you need to ask is ‘how much is it worth?’

This article, the second in our ‘Maximising business value’ series, provides an overview of the most common methods of valuing your business.

Valuing your business is all about setting a price expectation that will find willing buyers without selling yourself short given your efforts over the years.

Although there is no single formula that can be used to precisely value your business, the three most common methodologies used are as follows:

1. Market based approach

A very common way to value a business is by applying a sector derived multiple to a business’s earnings. This multiple is usually driven by comparable transactions in the market which will vary based on the nature of the business. For example, a fast moving business with high growth prospects will have a higher multiple than a mature business with low growth prospects.

It may be more appropriate to apply multiple ratios to revenue or gross profit when valuing certain types of businesses. For example, a revenue multiple may be more appropriate for a software business whereas a gross profit multiple may be more appropriate for recruitment or business support services businesses.    
 
2. Discounted cash flow approach

This method uses an estimate of the future cash flows of a business over a period of time, which is discounted (to reflect risk), to provide a current business valuation. The principle behind discounting is that projections become less reliable the further into the future you travel.

This method suits businesses with stable cash flows although it may also be used when a company has a lot of potential, but few assets and little financial history to speak of – for example, an early stage technology business.

3. Asset based approach

This method is more appropriate for established companies with a high level of tangible assets, such as property companies. The valuation is made by calculating the net realisable value of all assets.

Other factors that will influence value may include economic climate, regulations, strength of the management team, competitive tension in the process and IP/goodwill valuation. Ultimately, the company is ‘worth’ what a buyer is willing to pay, and an understanding from the outset of the worth of your business is key in ensuring that value for the shareholders is maximised. It is therefore a good idea to seek professional advice in helping to value your business.

Our next article will discuss ways to optimise the value of your business.

If you would like any further information on valuations or a no obligation discussion regarding the future of your business, please contact Ish Alg or Victoria Kiess.

 

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