Getting the asking price right is a tricky business. You may be tempted to ask too much, which means you’ll not only risk a lengthy sale period but there’s a good chance you’ll also have to slash the price a few months down the line. Aim too low, though and you could miss out on a substantial chunk of money.
It’s fair to say that although brokers do use a range of standard valuation techniques, there’s no hard-and-fast formula for getting it right – your business will be worth precisely as much as a buyer is willing to pay for it. Factors such as your location, brand, track record and potential for growth will shape your business’s value. Bizdaq has its own valuation tool that takes these things into account.
Excluding physical assets, the value of your business is tied up in intangibles such as your brand, staff, customer list and financial performance. Your buyer will definitely take all these things into account, but bear in mind that while your past performance will provide a good reference point, buyers will be much more interested in your future pipeline and recurring revenue streams.
Our top tips for valuing your business:
This is one of the simplest approaches to take when you’re trying to get a ball-park figure in mind. Begin by making a list of your business’s physical assets, including equipment and inventory. Consider how much your assets would cost to buy new and then factor in their age and condition to reach a realistic estimate. Most businesses find this will fall short of the actual value of the business which also has intangible assets such as cash flow and reputation, but it’s a useful starting point.
Put simply, multiples are ratios of business value to financial indicators such as revenue and cash flow. The multiples vary according to market sector and other factors but, as a rule of thumb, values usually vary from 2-10 times profit levels. Smaller, owner-operated businesses might employ a multiplication of the adjusted net profit. This involves taking the net profit and adding back owner expenses such as a salary, car or pension scheme. Running costs that may not apply to a new buyer may also be included.
You’ll only get the most accurate business calculation if you have the paperwork to back up you figures. Assemble accounts for the past 3-5 years and then prepare an income statement detailing your income, expenses and profits, a cash flow statement and a balance sheet listing the value of tangible assets and liabilities. Understanding how your business is growing (or not) will enable you to fine tune your asking price.
If you’ve owned your business for a number of years – perhaps having built it from scratch – you’ll rightly be attached to it. Unfortunately, this can mean you’re more likely to overestimate its value. Run your figures past someone whose judgement you trust – ask for (and accept) honest feedback. It’s OK to be proud of what you’ve achieved but don’t let it scupper your chances of a sale.