How Do I Value My Business?
Valuing your business is now as hard as you would be led to believe. It is not an exact science either but with a set of guidelines you can get very close. It comes down to personal preference for the final valuation but to get a very good idea we follow a specific model.
When discussing a valuation with a broker or an agent the valuations may be slightly off as it is in their interest to drive the commissions higher and to get the best possible deal for themselves. If you are looking to sell you business yourself on a website like businessownersdirect.com or other similar websites that remove the middle-man you will be able to deliver a much more accurate number. You could save yourself and the buyer 1000's in the transaction and sell your business quicker.
To value your business in simplest terms you will need:
- Net profit for the last 3 years
- Timeframe to exit
- Longevity and goodwill
- Assets
Now if this seems like a different language to you, do not worry we will run through what this actually means when it comes to finding that all important selling price for your business.
Net Profit
Firstly your business financials and net profit. This information is the most important and leads to the easiest form of valuation. Valuation by profits. This is the key information a potential buyer is looking for and in its simplest form tells the potential buy how much they will make if they invest X amount.
Take your average net profit over the last 3 years, add back in your salary, company benefits such as cars, insurances and personal expenses and then multiply this by 3 to 6. In basic terms this is your valuation.
Timeframe To Exit
Your timeframe to exiting the business can also affect the valuation that will be placed on the business. It can also be a point up for debate in the sale as it may be more or less beneficial to the new owner to have you still in the company. Do you need to have a hand-over process or is your business one you can simply walk away from. Would it be alarming to clients if you were to just leave?
Longevity and Goodwill
How long has your business been trading. This can be a major factor in being able to ask for a top valuation or one that may seem reduced to you. One years trading my increase the average valuation of your business but if you can prove consistent profits over many years then this will mean the valuation can stand-up to any scrutiny in the buying process.
Assets
Does you business own the assets that allows it to trade. Is it a restaurant that owns the machines or the building. Do you have a fleet of cars or vans? Even computers and desks have a value and this should be taken into account when selling the business. A new owner would expect to begin trading from the point where you leave the business and not have to buy new assets without a greatly reduced business valuation.
We hope that this guide will help you to better understand what is necessary to take into account when asking the question: "How do I value my business?". As mentioned at the beginning it is not an exact science and we see valuations of all kinds but sticking to these guidelines will help you to get a much closer, more sellable business valuation.