×

Warning

JUser: :_load: Unable to load user with ID: 748544

Print this page

Business valuation methods. How to know how much you’re worth.

Written by Posted On Thursday, 03 January 2019 19:12

Making the decision to sell your business is never a simple one. It may be a forced decision due to circumstances or it may be time to say goodbye and enjoy the rewards. Whichever it is, ascertaining the value is never a simple formula. After all, your business is only really worth what someone will pay for it – no matter how much you think that figure should be.

If you have made the decision to sell or you think it’s something that will be coming up in the future, there are a few different methods that the professionals use to value a business. The nature of your business will determine which method suits you best i.e. a café vs an online business.

Asset valuation method

This will tell you, if you were to close down today, what would your business be worth after all the assets and liabilities were counted.

So, if you own your office building and it’s worth $500,000 but you have a $200,000 mortgage and a $100,000 for your equipment etc. you have $300,000 worth of liabilities. This means, with this valuation, your business would be worth $200,000.

But what about the value of your brand? Your customers? Your reputation? These sorts of things are called goodwill. Goodwill is the things that aren’t easily valued but they are the backbone of your business. So, if your business is performing well then this probably isn’t the best method for you. However, if it’s underperforming and has no goodwill, then this could be an accurate way for you to value your business.

Comparable sales method

This is how it sounds – compare other businesses of a similar nature in your area of expertise and, if you have a physical site, location. Find out what they’ve sold for and value your business at a similar price. A business broker can help you with this if you’re not comfortable making that decision on your own.

Capitalised future earnings method

This is probably the most common way to value a small business (less than $2million turnover and fewer than 15 staff). When someone wants to buy your business, they want to buy its assets and the rights to the profits generated in the future (hopefully). By giving the future earnings an expected value, you’ve ‘capitalised’ them. This value then gives the expected return on investment (ROI) as a percentage or ratio. The higher the ROI the better the result for the buyer.

This will then enable the buyer to compare businesses based on the projected ROI, helping them to easily assess which one will be more profitable. Your tax accountant or business broker could help you with this to ensure its accuracy.

Find out how much it would cost to start again

If you were to start again, from the ground up, how much would it cost you to build the business. Calculate the cost of a similar business in the current market and use those costs to calculate how much yours is worth established. Don’t forget to take into account things such as buying stock, buying equipment and tools, recruiting and training, marketing and promotion, any licenses or permits you need, buying or leasing premises, setting up your website etc.

 

Article provided by Nash Advisory

Rate this item
(0 votes)

Latest from

Joomla! Debug Console

Session

Profile Information

Memory Usage

Database Queries