3 reliable ways to value your business
How much will your company be worth?
You’ll probably be disappointed when your company is valued, as nearly all entrepreneurs think their businesses are worth more. So how should you value it?
The value of your business is what the best purchaser will pay for it,” says Alysoun Stewart of Grant Thornton, and you can’t deny her logic. How much a business is worth is heavily dependent on who is buying it, how much competition there is and the state of the market. Nevertheless, you need to start somewhere, and the moneymen have various models for calculating your business’ worth – here are some of them:
Based on earnings
The most common method of valuing a business is to look at its earnings and to find a multiple of this figure. How big a multiple you use depends on how robust the business is in terms of its long-term contracts, historical earnings, future cashflow expectations and profitability. Typically, businesses sell for between five and eight times their earnings, but some companies can have multiples that go right into the teens or even above. There are different ways to calculate earnings, but the most commonly used method for valuations is EBIT (earnings before interest and tax). However, major purchases, such as property or IT systems, can make a mess of your balance sheet even when you are doing well. However, earnings can be ‘normalised’ to take this into account.
Some buyers want to pick up the assets of a company, but leave the history of the business with the owner. Physical assets, such as property and machinery, have a market value, and fixing a starting price is a fairly straightforward affair. However, non-tangible items, such as intellectual property or staff, are less easy to pin down. One of the main things that your competitors will value is your relationship with your clients. Long-term contracts can also be sold on with the blessing of your customers, and, once again, have a determinable value.
This is a method most commonly used in the technology field or for companies that require long-term investment before coming to market. Essentially, it means that the company’s future projections are used to value the business even though there’s no cashflow present. The dotcom era saw a peak in the use of this method and then an all too sudden trough. Of course, you don’t have to use just one of these ways to value your company, and a combination should help you find a starting figure. Although ultimately it’s the market that will be the deciding factor, you should do as much as you can to make sure you’re at least in the right ballpark.