How much is my business worth?
Valuing your business can help you focus on areas for improvement. In this blog we aim to answer a few questions you may have about valuing your business. Hopefully then helping you answer the question, how much is my business worth?
So, how do you even value a business? There are a few approaches you can take when it comes to valuing your business –
Price to earnings ratio (P/E)
Businesses are often valued by their price to earnings ratio (P/E) or multiples of profit. The P/E ratio is suited to businesses that have an established track record of profits.
Working out an appropriate P/E ratio to use can be driven by profits – if a business has high forecast profit growth, it might suggest a higher P/E ratio. And if a business has a good record of repeat earnings, it may have a higher P/E ratio.
Because P/E ratios differ wildly, there isn’t necessarily a standard ratio that can be used to value all businesses. An accountant or business adviser might suggest a valuation of four to 10 as a P/E ratio.
How much would it cost to set up a similar business to the one being valued? This is a simple one. You need to factor in everything that got the business to where it is today.
Make a note of all the startup costs, then its tangible assets. How much would it cost to develop any products, build up a customer base and recruit and train staff?
Think about savings you could make when setting up. If you can save money by locating the business somewhere else or by using cheaper materials, subtract that from the figure.
When you’ve taken everything into account, you’ve got your entry cost and a valuation.
Valuing the assets of a business
Established businesses with a lot of tangible assets are often suited to being valued on these assets. Good examples of businesses like this are those in property and manufacturing.
To do an asset valuation, you need to start with working out the Net Book Value (NBV) of the business. These are the assets recorded in the company’s accounts.
You should think about the economic reality surrounding the assets. This means adjusting the figures according to what the assets are actually worth.
Old stock depreciates in value. If there are debts that aren’t likely to be paid, take those off. Property can change in value, so refine those figures too.
Industry rules of thumb
Buying and selling businesses can be more common in particular industries. Those industries might have certain rules of thumb that you can use as a guide. They’ll be based on things other than profit.
A valuation based on what can’t be measured
If the business has desirable relationships with customers or suppliers, it might be more valuable to a buyer.
If the buyer doesn’t have a stable team behind them to take the business forward, a strong management team (that won’t jump ship) could also add value.
Each prospective buyer might see different risks, variably lowering the value. The key as a business owner is to pre-empt any risks and minimise them.
Business turnover is when you work out your business income over a set period of time (for example the tax year). This is the number of sales you’ve made, also known as the net sales figure. However, this can’t be confused with profit, which is your earnings after deducting expenses.
Calculating turnover is a useful step to understanding the health of your business fairly quickly. You will need to compare gross profit and net profit to give a full picture.
What affects a business valuation?
Some parts of your business will be easier to value, there’s always going to be tangible assets. Stock and fixed assets, like land and machinery, have clear value. You can also look at:
- What kind of product you have
- Business trademarks
- Circumstances around your valuation – is it a forced sale or voluntary?
- Business reputation
- Value of the business’s customers
- Age of the business – Is it a start up business making a loss but with future potential? Or an established profit making business?
- Strength of team behind the business
How much is my business worth?
There are lots of things you can do to secure a good valuation. Having a well structured business plan is one thing that can help value your business. A business plan can show how your business aims to achieve long and short term results. Reducing risks, for example, if you rely on a particular group of customers, consider diversifying.
What processes are in place for your business? Think about how you store information, the financial records or how the business works. The more you can show how your business operates, the more confidence in the business.
We hope this blog gives you a bit of an insight into how to value your business using the most popular methods. If you’d like to know more about how to value your business or how much it might be worth, give us a call today.