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Paul Dallibar

What's My Business Worth (Part II)

Con­tin­u­ing our look at var­i­ous meth­ods you can apply to mea­sur­ing the val­ue in your business

Asset Val­u­a­tion

If your busi­ness has a large amount of cap­i­tal equip­ment or prop­er­ty then a val­u­a­tion can be made on the net real­is­able val­ue of all the assets.

With fixed assets such as vehi­cles or equip­ment, we can use the depre­ci­a­tion values. 

How­ev­er, by just con­cen­trat­ing on the tan­gi­ble assets the val­u­a­tion does not con­sid­er the intan­gi­bles, which might be some of the most impor­tant assets in the busi­ness. It cer­tain­ly does not mea­sure all the years of hard work you have put into build­ing up the busi­ness name. 

Asset val­u­a­tion is often used when the busi­ness is under­go­ing a fire sale being closed down. This is often the case when the own­er is a sole trad­er or has sim­ply not put in place the process­es and pro­ce­dures to build a secure busi­ness. A sur­pris­ing num­ber of UK busi­ness­es (some esti­mates say up to 100,000) are closed down each year and assets sold off because a buy­er can­not be found to keep it running. 

Indus­try Valuations

With some indus­tries busi­ness­es may change hands on a reg­u­lar basis, which leads to more infor­ma­tion being avail­able on what val­u­a­tions buy­ers are pre­pared to pay. Exam­ples include newsagents and fran­chised food businesses.

In some indus­tries the val­u­a­tion appear to have lit­tle rela­tion to the under­ly­ing prof­itabil­i­ty or finances of the busi­ness, espe­cial­ly when we look at new tech­nolo­gies and social media com­pa­nies. The share price of Face­book, Twit­ter, Snap etc. when they launched an Ini­tial Pub­lic Offer­ing (IPO) was very much dri­ven by their num­ber of users and the assump­tion that a lot of mon­ey could be made because these plat­forms were used by so many people. 

But it does high­light the fact that if you can show that your under­ly­ing busi­ness is strong and you can do the right things to grow your cus­tomers and turnover, then your busi­ness is much more attrac­tive to a poten­tial buy­er and will com­mand a much high­er price than the finan­cial fig­ures indicate. 

Entry Cost Valuation

Rarely used, but a good way of tak­ing a dif­fer­ent view on a business’s val­ue, this is where you look at what it would cost a new entrant to set up a sim­i­lar busi­ness, to yours. Depend­ing on the busi­ness, this would include build­ing a cus­tomer base, build­ing the brand, acquir­ing premis­es, recruit­ing and train­ing staff as well as buy­ing equip­ment and devel­op­ing prod­ucts and services.

Unless suc­cess could be guar­an­teed from day 1, the cal­cu­la­tion would also have to include the costs the buy­er would have to sup­port until breakeven was achieved. 

Hav­ing ball-parked the entry cost val­u­a­tion could be a good tool to have in nego­ti­at­ing your sales prices. Point­ing out what costs the poten­tial buy­er would need to spend to build a busi­ness sim­i­lar to yours might help weak­en their hes­i­ta­tion to pay the price you want. 

In Sum­ma­ry

I hope this gives a flavour of how you can start valu­ing your busi­ness, but it only looks at the the­o­ret­i­cal val­ue in your busi­ness, not what some­one is pre­pared to pay for it. For a prop­er val­u­a­tion there are many oth­er fac­tors to take into account and in my next few blogs, I’ll be look­ing at these in great detail.

Final­ly, remem­ber valu­ing your busi­ness is not some­thing you do just when you come to sell. It’s often used by lenders in cal­cu­lat­ing if and how much to lend to your busi­ness. If you have an under­stand­ing of what your busi­ness might be worth, it could put you on a firmer foot­ing in nego­ti­a­tions with your bank. 

If you would like to know more about valu­ing your busi­ness or want to know how we can help you with your busi­ness exit strat­e­gy, con­tact us today.