What's My Business Worth (Part II)
Continuing our look at various methods you can apply to measuring the value in your business
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.
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.
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.