Simple Formulas Accountants Can Use to Value a Business

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Simple Formulas Accountants Can Use to Value a Business

When business owners are looking for a sales valuation, they turn to people they trust. As an accountant, if you’ve taken the care to build up a good relationship with your clients, you’ll be well placed not only to offer advice on getting the asking price right but also to help assemble the necessary paperwork and consult on the structure of the deal when a buyer is found.

There isn’t a guaranteed formula for arriving at a sensible market valuation; so much will depend on the intangibles like industry niche, economic outlook and confidence. Your client won’t be expecting guarantees, but they will be looking for an honest and fair figure that accurately reflects the mood of the market as well as a nuts-and-bolts assessment of your business finances.

There are some oft-used formulas upon which accountants can base their estimates and which provide a good platform for further fine-tuning but be aware that specialist businesses – or those with multiple operations – may require a more bespoke approach or the services of a broker with relevant experience. A good starting point is to research the asking price of other similar businesses operating in the same niche or geographical area.

Multiple of Earnings

One of the most commonly used formulas for a valuing business is based on a multiple of net profits. It calculates the total by applying a profit multiplier to a business’s annual adjusted net profit, which varies according to the industry sector. If a company makes £100,000 before tax and operates in a sector with an average 4x multiplier, the asking price would work out at £400,000, offering a 25% return on the buyer’s investment each year. The multiplier can be adjusted up or down according to the strength of your client’s proposition or to reflect the risk it represents. Small businesses usually have lower multipliers than big ones.

Asset Valuation

This is another straightforward valuation method that calculates a sale price by taking the business’s liabilities away from its assets, taking into account depreciation or appreciation along the way. It’s a useful approach if a business has much of its value tied up in assets – a farm or a factory with land and buildings, for example – and where a valuation based on the multiple-of-earnings approach may miss the mark.  An accountant is well placed to handle this kind of valuation, although you may need to consult a land or estate agent to fine-tune property values.

Entry Valuation

An entry valuation takes a buyer’s-eye view of calculating the price of a business, as it weighs the opportunity of acquiring a business that’s up and running against the costs of setting up a similar operation from scratch – the acquisition of premises and attracting customers and staff, for example. It’s by no means a precise approach but it’s a good exercise to undertake as it may flag the things that make your client’s business special, as well as those that might put purchasers off.

Valuing an Online Business

In many ways, valuing an online business follows the same basic rules as any other organisation. As a rule of thumb, take the annual revenue, minus costs and multiply by 2-4 times. Other factors, including how competitive the market is, whether the business is growing and what potential it offers are all relevant. In addition to income and expenditure information, you’ll also need to ask your client for traffic data, including unique visitors, page views, growth rates and traffic sources so purchasers where the revenue is coming from and how sustainable it is.

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