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Common valuation methods when selling a business

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Different valuation techniques to calculate the market value of your company

If you are wondering how much is my company worth as you wish to sell your business, you will need to arrange a company valuation. A business valuation will assess each area of your business and calculate the financial worth of your company. This information will provide a starting point for a sale price, and help the buyer attract investors and access borrowing.

A business valuation will typically be arranged or conducted by your appointed business transfer agent, company valuation specialist or M&A (merger and acquisition) advisory firm, depending on your business size and the deal structure you wish to pursue. Principal company valuation methods that are used to calculate business worth consist of valuing a business based on profit, asset value, industry rules of thumb and more.

How to calculate how much your business is worth

A company valuation assesses the financial health of your business, the value of company assets, company liabilities and cash flow. The main company valuation methods that are used include:

Asset Valuation  - An asset valuation calculates the total value of assets owned by your business, making this a suitable route if your business is asset rich, such as a hire business or property management business.

This route takes into consideration the future value of assets and those that are likely to be sold at a discounted rate. Business valuers also eliminate debts unlikely to be paid, also known as bad debts, as this could skew figures.

Price-to-earnings – The price-to-earnings ratio (P/E) route involves calculating net profit and multiplying this in accordance to set multiples for your sector, suitable for businesses with a profit-rich history.

The profit multiplier depends on the size of the business, ranging lower for smaller businesses, and increasing in tandem with business size and profitability. The market, customer base and risk exposure of your business also influence the P/E ratio.

Entry Cost – The entry cost company valuation method forecasts the costs required to set up a similar business and establish the standards upheld by your business today.

This includes recruiting employees, purchasing machinery and equipment, building brand reputation, and establishing company operations.

Discounted Cash Flow – A discounted cash flow valuation is suitable for businesses with predictable cash flow as it is based on forecasted future cash flow.

For this route to be suitable, your business must show consistent cash flow over the years and hold a reliable customer base. Future risks, such as a turn in economic conditions must be taken into consideration, including the value of money.

Industry rules of thumb – If business transfers are common in a particular industry, general guidance based on previous sales may dictate the going price for a business or how company worth can be calculated, also known as industry rules of thumb.

These rules are not set in stone, however, they can provide a starting point to help you gauge the market value of your business. The rules may relate to the size of the business, including contracts, employees, and market share. The route you take will be determined by whether the valuation is based on goodwill only, or goodwill and assets. 

In addition to common valuation methods, you will need to take into consideration mitigating factors that may be important to business buyers which we explain next.

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How much is my business worth?

When selling a business, take into consideration additional factors that could appeal to prospective buyers. This can range from unique selling points, such as location or additional products, to reputation and online presence. 

The circumstances of the sale can also influence how much a buyer will be willing to pay for your business, such as, if it is a forced sale (retirement, ill-health), or a voluntary sale (natural change of ownership/investment).

Value my business

When valuing a business, enlist a specialist in your sector to provide an accurate indication of how much your business is worth. Business valuation calculators are widely available online, however, the results generated are typically computer-led. Our in-house team of highly experienced business valuers manage our company valuation calculator and review each company valuation request.

We conduct numerous valuations of businesses every day and our company valuation services are trusted by professional intermediaries on a national scale. If you want an answer for what is my business worth, get in touch

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