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With that in mind, it is often difficult to place a sensible valuation on your business yourself. There is the obvious emotional attachment and that in itself can make objectivity tricky. Of course the old adage ‘a business is worth what someone is willing to pay for it’ almost always rings true, but that figure will invariably be determined by a number of factors.
What is paramount for us here at The Business Board is reaching a valuation that doesn’t fall short of what the business is actually worth. Of course, an over-valuation is equally damaging when marketing to prospective buyers and so it’s crucial all aspects are considered when estimating the valuation.
What can affect the value of a business?
There are some aspects of your business that will be easy to place a value on, whilst other more intangible assets will prove more difficult.
Aside from EBITDA, tangible fixed assets and stock, other elements to consider are:
[/cs_text][cs_icon_list][cs_icon_list_item title=”The value of your customer book or pipeline” type=”check-square” icon_color=”hsl(0, 98%, 50%)” link_enabled=”false” link_url=”#” link_new_tab=”false” _label=”The value of your customer book or pipeline”]The value of your customer book or pipeline[/cs_icon_list_item][cs_icon_list_item title=”How dependent the functionality of the business is on your shareholders” type=”check-square” icon_color=”hsl(0, 98%, 50%)” link_enabled=”false” link_url=”#” link_new_tab=”false” _label=”How dependent the functionality of the business is on your shareholders”]How dependent the functionality of the business is on your shareholders[/cs_icon_list_item][cs_icon_list_item title=”Your products” type=”check-square” icon_color=”hsl(0, 97%, 51%)” link_enabled=”false” link_url=”#” link_new_tab=”false” _label=”Your products”]Your products[/cs_icon_list_item][cs_icon_list_item title=”Your systems, processes and transparency ie how the business works” type=”check-square” icon_color=”hsl(0, 97%, 51%)” link_enabled=”false” link_url=”#” link_new_tab=”false” _label=”Your systems, processes and transparency ie how the business works”]Your systems, processes and transparency ie how the business works[/cs_icon_list_item][cs_icon_list_item title=”Any patents or trademarks you may hold” type=”check-square” icon_color=”hsl(0, 98%, 50%)” link_enabled=”false” link_url=”#” link_new_tab=”false” _label=”Any patents or trademarks you may hold”]Any patents or trademarks you may hold[/cs_icon_list_item][cs_icon_list_item title=”The reputation of your business within your industry” type=”check-square” icon_color=”hsl(0, 98%, 51%)” link_enabled=”false” link_url=”#” link_new_tab=”false” _label=”The reputation of your business within your industry”]The reputation of your business within your industry[/cs_icon_list_item][cs_icon_list_item title=”Your sector” type=”check-square” icon_color=”hsl(0, 98%, 50%)” link_enabled=”false” link_url=”#” link_new_tab=”false” _label=”Your sector”]Your sector[/cs_icon_list_item][/cs_icon_list][cs_text _order=”0″]
There are a variety of ways and logic to help you reach a more reliable figure for the above points, which we will look at in further detail as the article progresses.
Business Valuation Logic
P/E Ratio
The price to earnings ratio, or multiples of profit, is a common and important metric which is best suited to businesses that have a strong, historical track record of profits. Put simply, if a business is forecasted growth in profits, a higher p/e ratio could be assumed. Equally, any business with a strong history of repeat business would be considered to have a higher p/e ratio also.
Using a multiple of x4 times, a business making £1,000,000 in net profits would be valued at £4,000,000.
The multiple can vary from industry to industry and is dependent on a host of other factors, some of which we will discuss later, but very broadly, the p/e ratio technique is a good way to give you a pretty accurate valuation of your business. At The Business Board, we typically find our multiple most commonly being within 4-6x EBITDA.
Asset Valuation
In a scenario where a business has a number of tangible assets , such as manufacturing or engineering businesses, it is often the case that these businesses are valued on their assets. By ascertaining the value of your assets from your company accounts, you can work towards obtaining a Net Book Value. Of course, since you purchased your equipment or machinery their value will have been affected by depreciation or other market factors and so these values will need to be adjusted to reflect their true worth.
Cost of Entry
A basic technique, but one that can be extremely useful. By calculating all the costs you have accrued getting the business to where it is today, including everything from your tangible assets to how much it would cost to build a customer base, a sales and operations team and other recruitment costs. Once you’ve calculated this, give some thought to any potential savings that could be made such as relocating the business or by making cost savings elsewhere and subtract this from your figure. This will give you a good idea on the cost of entry and therefore, a valuation on your business.
A valuation based on the intangibles
There are a number of ‘intangibles’ which could affect the valuation of a business. Existing relationships with specific customers or suppliers that could be deemed desirable may make any acquisition more appealing to a potential buyer, as well as a strong second tier management team willing to remain after any sale. To go back to the point made at the beginning of this article, a business is broadly worth what a potential buyer is willing to pay and these intangibles will undoubtedly contribute to that.
What is my business worth?
By going through the valuation process for your own business, it will help to highlight some of the areas your business may need to focus on to improve is ‘most probable sale price’.
In order to maximise the price you achieve, there are a number of ‘good practices’ you can follow. Our previous article, https://www.thebusinessboard.co.uk/boosting-the-value-of-your-company/, will give you a guide on some of the areas you can focus your attention.
As with any potential business sale, the valuation process is a collaborative effort. By working closely with The Business Board, we use our many years of business sales experience to achieve a valuation that satisfies your expectations, whilst also arriving at a ‘most probable sale price’ that is in line with the current market and financial landscape.
If you would like to talk to us about your own exit strategy, or you would simply like a discussion around the valuation of your business, feel free to give us a call on 0118 338 1818 to speak to one of our consultants. Alternatively you can email us at: info@thebusinessboard.co.uk.
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