A business’ value can be established using a variety of methods. It could be based on industry rules of thumb, for example, forecasted cash flow, or profit levels. Whichever method is used, however, a realistic business value is foundational for the selling process.
Overvaluation is self-defeating, as it can deter suitable buyers, but undervaluing your company also leads to you missing out on valuable profit. The best way to obtain an accurate business valuation is to use professional valuers who understand your industry.
The importance of using professional business valuers
A reliable business valuation conducted by experienced professionals ensures that you attract the most suitable interest so that you can proceed with confidence during the negotiation stage.
Selling My Business are professional business transfer agents with extensive experience in valuing businesses industry-wide. We’ll assess your business, calculate an accurate valuation, and support you through the entire sale process.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
Calculating a business valuation
Methods of valuing businesses include:
Industry ‘rules of thumb’
In industries where businesses are frequently bought and sold, past sales of similar businesses can provide a useful guide to the market value of your company. So what might be assessed using this method?
- The value of business assets
- The value of your contracts
- Your share of the market
- The size of your business
Cost of entry
This method considers how much it would cost to set up and build up a similar business to yours. In this case, consideration is given to such set-up costs as staff training and development, purchasing hard assets, and developing or automating systems.
The reputation your business has built up is also factored in, and once these costs have been determined, any savings that can be made are deducted to arrive at the entry cost valuation figure.
Discounted cash flow
The discounted cash flow method is a form of income-based valuation that relies on your business previously operating with consistent and predictable cash flows. It uses a forecast of the business’s future cash flows based on this.
Businesses suitable for this method should have operated with a solid and loyal customer base for several years or more. This is a complex calculation into which future risks are also incorporated.
Price to earnings ratio (P/E)
A profit multiplier can be used to establish the valuation of businesses with a history of strong profits. The multiplier that’s used depends on the sector and it multiplies the business’ net profit figure.
A lower profit multiplier is typically used for smaller businesses, but other factors are also taken into account, such as the market in which the business operates and its exposure to risk.
For more information on the best way to value your business please get in touch with our expert team. Selling My Business has a combined 60+ years of experience and operates an extensive network of offices around the UK.