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Paul Dallibar

What's My Business Worth (Part I)

It’s some­thing you prob­a­bly need and want to know but may strug­gle to answer. You could just assume it’s worth what­ev­er some­one else is pre­pared to pay for it. But when it comes to sell­ing your busi­ness it‘s impor­tant to have prop­er­ly cal­cu­lat­ed at least a rough fig­ure of the val­ue in your business.

Apart from being the start­ing point for nego­ti­a­tions it will also more impor­tant­ly, give you a real­is­tic idea if the sale is going to give you the mon­ey you need in lat­er life. 

Unfor­tu­nate­ly, there is no sin­gle for­mu­la that can be used to deter­mine the pre­cise val­ue in every busi­ness. Busi­ness assets, in most cas­es are com­prised of both tan­gi­ble (turnover, prof­it, stock) and intan­gi­ble (brand, trade­marks, cus­tomer base, staff etc.). It’s eas­i­er to cal­cu­late the price on the for­mer, but not so the latter. 

So let’s have a look at the most com­mon­ly used tech­niques for cal­cu­lat­ing the val­ue of a business. 

Price Earn­ings

The Price / Earn­ings Ratio rep­re­sents the val­ue of the busi­ness divid­ed by its post-tax prof­its. It’s a good way of com­par­ing your offer to oth­er trade sales of busi­ness­es in the same industry.

As an exam­ple, if you were offered £250,000 and your com­pa­ny is mak­ing annu­al post-tax prof­its of £50,000 the P/E ratio would be 5250,00050,000). But what does that mean? 

P/E Ratio is more com­mon­ly used to val­ue big­ger, often FTSE list­ed, com­pa­nies, where com­par­isons to trade sales and indus­try com­peti­tors are more read­i­ly avail­able. It’s also more rel­e­vant where there is rea­son­able busi­ness stability. 

The ratio is often used by stock mar­ket investors to cal­cu­late if the share price of the com­pa­ny they are invest­ing in is over or under priced. 

Small­er busi­ness­es are more like­ly to be impact­ed by a major change, such as a change of founder, loss of a major cus­tomer, sup­pli­er or mem­ber of staff. As result, they’re seen as hav­ing a high­er risk and this is often reflect­ed in a low­er P/E ratio. 


Sim­i­lar to the P/E ratio, this is a method based on earn­ings. The fig­ure used is often cal­cu­lat­ed by look­ing at earn­ings before inter­est, tax, depre­ci­a­tion and amor­ti­sa­tion costs (EBIT­DA) are removed and then mul­ti­ply­ing the EBIT­DA fig­ure by a com­mon­ly accept­ed indus­try mul­ti­pli­er. By find­ing out what is gen­er­al­ly used in your indus­try, you can ball-park your company’s val­ue and because it is an eas­i­er to under­stand method, it is the one most often used.

At its essence the mul­ti­pli­er gen­er­al­ly reflects the num­ber of years of cash-flow your busi­ness is worth. 

It’s easy to say 4 times val­ue is the mul­ti­pli­er being used in my indus­try, so if I’m mak­ing an EBIT­DA of £250,000 my busi­ness is worth £1m+.

That’s not to say how­ev­er that because your indus­try assumes a cer­tain val­ue is being wide­ly used or a com­peti­tor has been sold for a cer­tain val­ue, you are going to nat­u­ral­ly get that mul­ti­pli­er. A busi­ness oper­at­ing with a low­er cost income ratio than yours or has a greater degree of recur­ring income, rather than rely­ing on con­stant new orders, is going to attract a greater multiplier. 

Using a mul­ti­pli­er only gives a rough guide as to your val­ue. It’s not gospel and a prospec­tive buy­er will soon chip away at your assumed price if the oth­er parts of the busi­ness are not up to scratch. 

Dis­count­ed Cash Flow (DCF)

Here we assume the val­ue of the com­pa­ny is the sum of its future cash-flows over a cer­tain time­frame. By fore­cast­ing the company’s cash-flow (or future prof­its) and then dis­count­ing for the time cost of mon­ey, we arrive at a present val­ue of the business.

The key points to note are: 

  • The accu­ra­cy of the future cash-flows is impor­tant so sev­er­al years of good accounts and an excel­lent busi­ness plan will be required to demon­strate the poten­tial val­ue of your business. 
  • The time peri­od cho­sen. If your cus­tomers are con­tract­ed to you over a long peri­od, the num­ber of years used can be greater than, say, retail ad-hoc customers. 
  • The effect of the dis­count rate. 

When using this method­ol­o­gy, we often look at where else a buy­er could put his mon­ey. If he invest­ed in the stock mar­ket maybe he could expect a return of 6% and use that as the dis­count rate. 

So what does that mean in prac­tice? If we assume a busi­ness makes annu­al post-tax prof­its of £50,000 for 5 years and assume a dis­count rate of 6%, the present val­ue of the busi­ness comes to £210,618.

If the poten­tial buy­er thought the pur­chase was more risky and so chose a high­er dis­count rate of 9%, the cal­cu­lat­ed present val­ue would be £194,483.

Fore­cast­ing future prof­its can be a dark art and any esti­mates need to be backed up by both past his­to­ry and good evi­dence that future prof­its are achiev­able. In cal­cu­lat­ing val­ues, we have often used both qual­i­fied fig­ures and planned num­bers to show more clear­ly the link between past per­for­mance and future expec­ta­tions. Backed up by a bloody good busi­ness plan. 

The meth­ods I have out­lined above are the main ones used to mea­sure val­ue in your busi­ness. In my next arti­cle I will cov­er some more ways you can clac­u­late what your busi­ness is worth.