Valuing a Small Business

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Valuing a Small Business

No matter how well acquainted you are with your balance sheet, profit & loss, or cost of goods, arriving at a fair market valuation for your company is tricky. There are a few common formulae used to arrive at a ballpark figure, but it’s important to remember that your business is worth precisely what someone is willing and able to pay for it at the time you need to find a buyer!

How Does the Bizdaq Valuation Calculator Work?

We’ve created an algorithm based on our over thirty years of experience that analyses different data points from a variety of sources – including actual businesses sold in your market and your geographical area – to create a fair and accurate estimate of business value.

You start by entering a few key financial details. The valuation calculator looks at this information, applies the relevant multiplier for your industry sector, and factors in recent sales of similar businesses in your area. Once you’ve done this, you’ll have a good idea of what your business is worth in the current market – which is invaluable if you are planning on it.

How Do You Value a Business?

1. Multiple of Profits Valuation

A multiple of profit valuation calculates the business’s total value based on its profitability. To arrive at a value, simply multiply your business’s annual adjusted net profit by a profit multiplier based on your industry sector. These multipliers vary depending on sector, and may be adjusted up if you have a strong commercial proposition – perhaps with valuable intellectual property – or down if your business presents more of a risk in terms of profitability. Small businesses usually have lower multipliers than big ones.

2. Asset Valuation

This simple valuation method looks at the value of your business as the total value of the assets minus its liabilities. It takes into account factors like account inflation, depreciation, or appreciation. It’s a method more commonly used where a business has a high value of assets – like property, for instance – which may not be fully realised using the multiple of profits approach.

3. Entry Valuation

A potential buyer typically does an entry valuation – especially if they’re weighing up the advantages of acquiring your business as opposed to starting up their own. As you might expect, the valuation takes into account the cost of setting up a similar business – acquiring premises, training staff, establishing a customer base and such. As a seller, it’s worth giving this approach some thought so you can also look at what makes your business special and might particularly appeal to a buyer looking for a differentiator.

How Can I Improve the Value of My Business Before I Sell?

Raising the Stakes

Sometimes a few simple changes can raise the perceived or actual value of your business. It’s a good idea to consider valuing your business several months in advance of any proposed sale. Take time to analyse the current position of your business and list those things that could make it a more compelling proposition for a buyer. If you can bring more business in, increase profitability and establish a solid pipeline, you will have a better chance of realising your business’s full potential through a good price and a quick transaction. But if you can only do a few small things – such as preparing a sales pack with up-to-date paperwork, staff details and customer contacts - it will make a difference to overall saleability and speed up the process.

Good staff are an asset to any sale and may be the icing on the cake for a purchaser. But make sure your business can run efficiently without you at the helm or you risk adversely affecting its value. A business that has effective management and operational systems in place will command a better price.

If you would like further information on how to value a business, feel free to contact our team.

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