The first, and most important, part of selling your business is getting an accurate valuation. The entire selling process hinges on finding an accurate price – price too high and you’ll struggle to attract buyers, but price too low and you’ll miss out on your hard-earned money. So how do you do it?
At Intelligent we have over ten years’ experience in providing accurate valuations for businesses, and we’ve found several ways to generate an asking price that is fair for both buyers and sellers alike. Find out how to value your business below.
Multiple of Profits
The multiple of profits is the most commonly used method for assessing the value of a business, and is often the basis for other valuation techniques. "Multiple of profits" calculates the profits a buyer will be able extract from a business before interest, taxes, depreciation, and amortisation.
The multiple ratios used vary according to industry, location, size of the business and turnover, and although the general calculations might be relatively easy to arrive at, there is no standard ratio that can be used across all types of business.
This method also factors in asset value and freehold value (if you own the property you operate from) to help bolster your business’s value.
An entry valuation is unique, in that it looks at how much it would cost to set up a similar business rather than purchasing yours. It looks at how much it would cost to purchase all the assets in your business, the cost of training staff, building a customer base and even how much it would cost to develop the product you sell.
This type of valuation can be useful for more corporate companies, rather than say cafes or coffee shops, and companies deciding whether to enter a market or purchase an existing business will look to this method in particular
For companies with a great deal of assets (manufacturing businesses and property businesses as an example), an asset valuation can be used. This method simply looks at the total assets minus the total liabilities of your business.
The key to an accurate asset valuation is getting your books in order, and making sure that all the figures are correct. Ensure that your books are up to date, and that all values (and liabilities) listed are accurate and representative. This will be what decides the business’s value, and any buyer worth their salt will notice if the numbers are incorrect.
How do I Raise the Value of my Business?
Of course, after “how much is my business worth?”, the next question will be “how do I increase the value of my business?”. Luckily there are many ways any small business owner can raise the value of their business, ranging from quick fixes to lengthy tasks.
Prepare your books in advance – often the most overlooked, yet incredibly important, aspect of getting a business valued is ensuring that your books are in order. It’s all too easy to let them get out of hand, but any serious buyer won’t consider a business that doesn’t have up-to-date records available. Preparing in advance will save you time later, and help your valuation now.
Make quick fixes and upgrade – as with buying a house, a business that has many small, niggling issues won’t be as attractive to a buyer as one with everything fixed. Perhaps there are a few things that need fixing in the business – be it a till that’s not working or fridges that are out of date – sorting these out before a valuation will help you to make more of your business’s worth.
Reduce the risk – business buyers are looking for low-risk, high-potential businesses. If you operate on one revenue stream, or rely on one or two employees to run the business, this will increase the risk for a potential buyer (and push down the value in turn). Where possible, reduce the risk for a potential buyer to increase the value of your business.
Identify what makes your business unique – small businesses are the apples of their owners’ eyes, and each one is unique. That’s not necessarily how a buyer sees it though. Demonstrating what makes your business unique will increase its value over that of competitors. Perhaps you have an exclusive deal with suppliers, benefit from a prominent location, or have partnered with another company. Show this, and you’ll increase your valuation.
Consider timing – all businesses naturally have good and bad periods. It can be seasonal, it can be weather-related, it could even be there is a lack of demand at certain times. The key here is to look for a valuation during a good time. This may seem counter-intuitive – you want to sell because it’s bad, but want to make the most whilst it’s good – but buyers want to buy businesses that are performing well. Assess your value at a good time and you’ll benefit.
What counts against my valuation?
As values can go up, they can also go down. To ensure your business achieves the highest possible value, look to avoid the following.
A lack of growth prospects – values are very much dependent on what a buyer will pay for a business, and buyers always pay more for businesses with clear growth prospects. This can be a catch-22 as you’re unlikely to sell when there’s a clear path to growth, however if you can’t demonstrate anywhere to grow the business, your value will suffer.
Restrictive contracts – business owners enter into contracts with suppliers for many reasons. Perhaps you’re not allowed to market or compete in certain areas, or you’re paying above the odds for stock. These will affect your business’s value.
Additional risk – all businesses come with risk, however if you have more than the next business for sale, your value will decrease. An owner-operated business presents a greater risk to a buyer than one with an existing management team in place, whilst relying on one supplier could leave your business scuppered if the supplier shuts down.
How can I start?
Finding an accurate valuation for your business is tough. That’s why we provide a free business valuation for any small business owner looking to find out the value of their business.