You had an extra child…and you didn’t realise it…or perhaps you did.

Your business, it’s been the joy and pain of your life for a number of years.  You guided, fought for and watched it grow.  And now the next chapter has arrived and you are looking to see how much it is worth.  You might be planning for the future, or perhaps you are simply curious.

Valuing a business can be a complicated process with many factors impacting upon the final figure such as:

For this reason it is a good idea to employ someone experienced in the area to help in valuing the business.  But remember, no matter how many experts, consultants or fairy god mothers you employ to help you, your business will only ever be worth what the market wants to pay for it.

Fariy God Mother’s aside, the two most frequently used methods to value a business are:

So let’s take a quick look at each:

Asset Valuation Method

Very broadly, this method of valuation involves totalling all the tangible and intangible assets of the business.  This method can be problematic for a few reasons.

Firstly, some assets may have declined in value over time (i.e. depreciable assets such as plant) and may be worth far less than expected.  Secondly, intangible assets, by their very nature, can be difficult to value (for example a client list, goodwill, intellectual property).  Finally, assets specific to your business may be worth far more to your business than they would be worth on the open market thus overvaluing your business and making it harder to sell.

This method of valuing a business really struggles to capture the true worth of a business where a lot of the value is kept in goodwill for example an architectural practice where predominantly all the value lies in the client relationships rather than the assets themselves.  For these types of businesses, the return on investment method of valuation may be more reliable.

Return on Investment Method

As the name of this method implies, it involves using a multiplier of either annual profit or revenue to determine the length of time a potential purchaser would take to make back their investment.  For example two times profit would mean they would hope to make their money back in two years.  In order to determine the multiplier, there are several factors which need to be considered (this list is no exhaustive):

It can be difficult estimating the multiplier, but as a starting point it would be wise to review recent sales of other businesses in the industry to see what multiples have been used.

Conclusion

Whatever your reason for valuing your business, it is important to ensure a realistic value is reached using the most appropriate method for both your business and the industry it operates in.  This can mean the difference between a business which sells quickly and painlessly and one which sticks around long past its use by date.

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