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A Guide To Valuating Your Business
Whether you’re looking to , attract new investors or develop an internal market for shares, valuing your company won’t be a straightforward process. Unlike a house, business buyers aren’t just paying for bricks and mortar; instead, there’s equipment, staff, profit, revenues, trademarks and liabilities to consider, too.
If you’re looking to sell your business, you’ll need to set a price that will attract potential buyers without selling yourself short. Normally, businesses are valued by a Multiple of Profit, but other models do exist. Let’s take a look at some of the ways you can value your business below.
Valuing Your Assets
The asset valuation method is ideal for businesses with sizeable tangible assets. A tangible asset takes on a physical form, such as machinery, land or inventory. An intangible asset, on the other hand, is a non-physical asset, such as intellectual property or brand recognition.
To complete an asset valuation, you’ll need to work out the Net Book Value (NBV) of your business: your total assets minus your total liabilities. However, it’s important to note that this may not include factors such as appreciation, depreciation or inflation, so you’ll want to ensure all your asset values are kept up to date.
Price To Earnings Ratio
The P/E ratio method is suitable for businesses with a good record of profitability. Often, a business with a high forecast growth will have a higher P/E ratio, as will a business with good repeat earnings.
This method involves adjusting your annual or monthly profits to exclude one-off purchases or unforeseeable events to ensure you have a good idea of your future profits. You’ll also need to add further gains or costs made after the company has been invested in or sold to produce a normalised profit.
Once you have your normalised profit, you can times this by three or five, which is the standard industry practice. The final figure will be your Price to Earnings ratio.
A relatively simple method, all you need to do is ask yourself how much it would cost to set up a similar company to the one currently being valued. However, to do this, you need to take into account all the factors that got the business to where it is right now.
Make a note of any tangible assets and start-up costs and consider how much it would cost to recruit staff, develop new products and build up a customer base. Finally, think about how you could potentially save money when setting up a new business (moving to a cheaper location, for example) and deduct this from your figure. Once you’ve taken everything into account, you have your final valuation.
Valuing Your Business Successfully
There are a number of other methods you could use, including discounted cash flow and comparables. However, if you’re looking to sell your business fast, be sure to get in touch with Business Trade Centre to see how the team can help you. We have Bronze, Silver and Gold packages available for those looking to sell, and we’re happy to offer advice on the valuation process before you list your business.