Valuing your business: a quick how-to guide
GB's quick guide on naming a price that's realistic and future-proof
Before you launch your exit strategy, you need to have a clear, objective idea of how much your business is worth.
If you value your business too high, potential buyers may see you as naïve at best, devious at worst; conversely, if you put too low a figure on your business, you could well end up being ripped off. So it’s important that you find a middle ground – a figure which is sensible, comprehensive and future-proof.
How to get the right figure
Valuing a business takes time and effort, but there are plenty of ways you can do it. Here are some of the most common:
Profits. If you’re making a healthy profit, it seems sensible to base your valuation on this, because it will be a primary motivation for any buyer.
To get an idea of your profit-based value, you should take your profit and multiply it by a certain figure, known as the profit/earnings ratio, or P/E.
Your P/E will depend on various factors, including the size of your company and its rate of growth. The larger your company and its rate of growth, the higher your P/E is likely to be. A number of firms, such as Haines Watts, offer free valuation calculators to give your firm an income-based value.
Assets. For companies in the early stages of development, or those built on physical property (such as hotels, restaurants and plant hire firms), it may be better to base the valuation on assets rather than profit.
To come up with a comprehensive asset valuation, you need to think about all types of asset in your possession – including those which aren’t physical, and those you haven’t paid for. Such assets include:
… Premises and property … Plant … Land … Premises … IT and technology … Contact details (phone number, IP address) … Furniture … Brand identity … Intellectual property and patents
To ensure total accuracy, it’s probably best to value each asset separately. A quick Google search will bring up an array of specialist valuation companies for each type of asset, and you can find further info from the likes of the Valuation Office Agency and the World Intellectual Property Organization.
Once you’ve valued all your assets, you then need to do the same for all your liabilities – considering everything from debts and mortgage repayments to the cost of replacing ageing or defective equipment. Once you’ve got a firm figure for both assets and liabilities, subtract the latter from the former to get your asset valuation.
Costs. This method of valuation, similar to assets, refers to the amount of money it would cost someone else to set up your business today, from scratch.
If you’ve kept your financial records up to date, it should be fairly easy to work out how much you’ve paid for each of your assets, and concoct a relevant figure from there. But bear in mind that cost-based valuations can be flawed.
If you paid over the odds for your assets, or invested in equipment which has since been superseded on the market, you run the risk of valuing your company too highly; likewise, if you’re a crash-hot entrepreneur with a business built on bargain buys and cost-cuts, you’ve got to be careful you don’t under-value the company.
Market. If you don’t own many assets, and aren’t turning a big profit, you may wish to pursue a market-based valuation – which is based on what the market is prepared to pay for your company.
You can get a rough idea of your market value by finding out what similar companies have sold for in the recent past. But bear in mind that market rates and preferences fluctuate constantly, and it can be very difficult to get accurate figures on the amounts other companies have sold for.
How to use your valuation
Valuing your business properly is only half the battle; you also have to use your valuation wisely, and work out in your own mind how much importance to place on it.
Whenever you’re negotiating a sale or exit, you should have your valuation in the back of your mind. But it’s unlikely that the buyer will meet your valuation exactly, so, before you begin the sales process, think about how much leeway you’re prepared to accept.
If you prepared to settle for, say, a price five or 10% below your own valuation, you’ll have a vital cushion going into the negotiations, and won’t be burdened with the pressure of hitting a be-all-and-end-all target. It’s important to stick to your guns, but it’s also important to stay relaxed and realistic – if you can do, you’ll control the negotiations.