I’m interested in finding out the exact value of my business with a view to selling it at some point in the future.
But I’m not sure how to break it down and even less sure how to accurately value things like the branding and strength of my client relationships.
Where do I start?
Establishing the value of your company is by no means a cake walk but is a good thing to do to help you plan your next steps
Myron Jobson, of This is Money, says: Fans of the TV show Dragon’s Den will be familiar with the sight of budding entrepreneurs being taken down a peg or two for over-estimating the value of their companies.
Whether you’re looking to shift your business or you’re simply interested in gauging how much it has grown under your stewardship, getting an idea of how much your company could sell for can help you plan your next steps.
However, putting a pounds and pence figure on your business is easier said than done because you’ll need to factor in more than just crunching numbers on the firm’s balance sheet.
In truth, a lot depends on perception, but there are some fundamentals which feature in most company valuations.
To help you on your way, we’ve asked two experts in the field of business accountancy to offer guidance on how to identify what your company is really worth.
Gary Turner, managing director and co-founder at cloud accountancy software provider for small business Xero, replies: Most business owners have put a significant amount of time, resource and energy into their venture, so it comes as no surprise that the decision to sell can be an extremely difficult one.
It can be a lengthy process – and that initial decision is long before you’ve gone out and found someone interested in your business.
Many entrepreneurs seeking business investment on TV show Dragon’s Den have been guilty of over-valuing their company
Determining a sensible and realistic price should be your first step.
Buyers are rarely sentimental, so it’s important that the business owner is pragmatic and tries to remove emotion.
Step back and determine where the true value lies. Never let it go for less than it’s worth, but don’t start out with the expectation that it will sell for more.
Businesses are usually valued at a multiple of their revenue, so a good rule of thumb is to sell your business for two or three times its annual profit.
But while multiples of earnings can be used as a business valuation method, be aware that there is no standard price earnings (P/E) ratio figure that can be used to value every business.
Due diligence and maintaining a healthy bottom line is all part of the journey to letting go
Companies within certain industries, such as IT and technology will typically command a higher ratio than bricks and mortar businesses like cafés or retail shops.
The higher the risk of buying the business – if the business is very reliant on one main product or has a small number of key executives for example – will also mean a lower P/E ratio.
If your business has a high level of tangible assets such as a property company or estate agent, another option is an asset valuation which will give you the net realisable value of all assets minus the total value of its liabilities.
But if you’re still not sure how much to sell your business for, consider getting advice from an accountant or broker.
Due diligence and maintaining a healthy bottom line is all part of the journey to letting go.
Before you start looking for suitors, it’s vital you get your affairs in order to maintain a healthy cashflow to avoid putting off potential buyers, ensuring you get the best deal possible.
It’s important to iron out any financial irregularities to make your company look like an opportunity, not a risk.
Whether you’re lacking detailed records, don’t know how much money you’re making, or can’t easily access the right report, you’ll put a buyer off even if nothing’s wrong.
If you’re selling, seek guidance from an accountant who can help prepare all the right reports you’ll need.
And if you need to, you can appoint a broker to sell the company on your behalf. It will come at a cost – often around 10 per cent of the sale price – but if you want to offload your company it may be the best option.
Remember that the valuation and sale of your business will also fluctuate depending on the market conditions, buyer circumstances, company reputation and the type of clients or customers.
Richard Bland, chief executive officer of Pomanda, a business valuation online platform, adds: There are several ways to reach a valuation – the most common are by comparing yourself to what other similar companies have sold for, or by working out the value of cash your business is expected to generate in the future.
Let’s look first at the comparison method. This uses what those in the finance world call ‘multiples.’ These are numbers based on what companies have sold for in the past.
Different industries have different multiples and within industries the multiples will also vary – take for example a high street retailer, which will typically attract a lower multiple compared to a retail company that does the bulk of its business online.
You can use an online business valuation tool or you can take a DIY approach by looking online for your sector’s industry multiple.
Multiplying your latest earnings before interest, taxes, depreciation, and amortisation (or EBITDA) by your sector’s multiple will give you a guide valuation for your business.
There are two things to watch out for here. Firstly, make sure you’re using the multiple for the industry that’s most similar to the one your business is in.
Secondly, bear in mind that multiples may be based on what public companies have sold for. If you’re a smaller, private company, don’t expect the same number. Your business won’t enjoy the same benefits of scale and, as a private business, your shares are harder to sell.
So you’ll need to revise the numbers down a bit – the hard part is working out by how much.
It can sometimes be difficult for business owners to maintain an objective view; especially since building your own business can often feel like a labour of love
Richard Bland of Pomanda
The second method you can try requires you to work out how you think your business might perform in the years ahead. Take your company’s past performance as your starting point.
Then think about what your growth, margins, capital expenditure and working capital requirements may be in the future. If you think you’re going to grow quicker than in previous years, then adjust growth upwards – but make sure you can justify it.
If it means you need to add some more staff or new machinery to deliver it, then don’t forget to include those costs in the future plans.
Similarly, if you’ve had a large one-off expenditure in the past, then take that out of your assumptions since it won’t be repeated in future.
You are effectively making projections of your future business cash flows, therefore you need to discount the values to arrive at what they are worth today if you had it in your pocket (usually a pound in the future will be worth less than if you had it today).
This gives you another guide to your company’s valuation using discounted cash flow analysis.
After you’ve crunched the numbers and done some sums, you will need to prepare a story that backs up your numbers and provides context.
The numbers and the story go hand in hand and need equal attention from you as the business owner – if you don’t know this stuff inside out you will lose credibility.
It can sometimes be difficult for business owners to maintain an objective view; especially since building your own business can often feel like a labour of love.
Remember to keep a cool head, even when people are picking holes in your business case, as ultimately these questions are a useful stress test for you.
Small Business Essentials