Your business’s true value is what someone is willing to pay for it. In order to ensure you attract the best offers, you need to have an accurate idea of what your business is worth.
Business valuation is an important aspect of running a company, and should not only be done directly before you intend to sell.
In many cases, a valuation can highlight areas of your business that can be enhanced to improve the overall value. However, if these are only discovered at the point of sale, there is little time to implement changes and increase the value of your business.
As you can imagine, the meat of your business valuation is based on factors you have direct control over. However, it is important to recognise that at any one time, there will also be a number of external factors that impact the price too.
For that reason, if you haven’t had your business valued recently, or at all, it may be worth doing so. Let’s look at the key factors that will inform your business valuation.
Business Valuation Factors
A good place to start any valuation is by looking at the business as a whole. While there are common factors used in every valuation, it’s important to realise businesses in different industries can vary wildly in value from one another, even if they look similar on paper.
When starting a valuation, the first step is to look at the facts, such as:
- Age: While age is no guarantee of a higher value, most businesses that have been around longer are worth more than their younger counterparts due to greater reputation and a larger number of customers.
- Size: Like the age of your business, its size is a strong indicator of its value. Larger businesses are often, though not always, more stable and self-sustaining, presenting less risk for a potential buyer.
- Location: If your industry relies on being close to your customers, e.g. a restaurant, then location is key.
Aside from the general profile of a business, the most obvious factors in valuing a business can be found in its finances. Ultimately, a business needs to be making money if you expect someone to buy it from you, and the more money you’re making, the more you can sell for.
Here are a few key finance metrics by which your business will be valued:
- Historical performance: When valuing a business, it’s important to remember that you need to show more than a few months of finances. Buyers want to see that your business is producing stable profits, so you’ll need to look at your books for at least the last two or three years.
- Future projections: As well as looking at how your business performed in the past, a valuation will take into account the potential it has in the future. Having an idea of where your business is going and what it can deliver is key then.
- Customer metrics: Your finances are based on being able to sell a product or service and who you sell them to can also play a part in your valuation. Metrics such as the number of customers you have, how much they spend, and how long they’re likely to keep buying from you can all come into play.
Assets and Intangibles
The methods for valuing businesses vary greatly. If you’re in an industry where you sell a physical product, then you’re likely to have a high number of assets that need to be taken into consideration.
Likewise, every business will have elements that offer a value that is hard to put an exact price on. These assets and intangibles include:
- Equipment: From manufacturing machinery to office furniture and computers, every piece of equipment your business owns needs to be given a value and added up.
- Stock: Like equipment, if your business has stock, a value will need to be given to this. If your business has a large amount of stock, this may even form one of the foundations on which your business is valued.
- IP and reputation: One of the hardest things to give a value to is how much your brand and reputation is worth, along with any intellectual property. This is where using an experienced valuer becomes key.
One element that increases a business’s value is whether it can run itself, or whether the owner is still an integral cog in making sure everything stays on track. Therefore, how your business is structured becomes very important.
Factors relating to structure that impact your business valuation include:
- Management structure: Most buyers don’t want to be involved in the day-to-day management of the company after the purchase, so if they don’t have to be, your business is likely to be worth more.
- Staff stability: You want to be able to demonstrate that you have high-quality staff that remain with your business for a long time. That way buyers can be confident that they are not going to have to restaff the business shortly after purchase.
- Group structure: If you’re selling a group of businesses, you’ll need to show how they all interact with one another and demonstrate the individual value of the group as a whole.
We’ve looked at valuing your business from the point of view of demonstrating the benefits, but you also have to demonstrate that there are no skeletons hiding in the closet.
You need to assure a buyer that the purchase comes with little to no risk, the more risk, the less your business is worth. Here are a few factors to consider:
- Contracts: Ensuring contracts are in place for all key stakeholders, is important for demonstrating that the financial model the business is operating on will not be disrupted by new ownership.
- Customer diversification: If your business generates a large amount of income from a small number of customers, the loss of a customer could have huge ramifications. To reduce this risk, aim to have a diverse range of customers.
- Liabilities: Just as you have money coming in, you also have money going out. Debts and other liabilities will obviously have an impact on how much your business is worth.
External Valuation Factors
As we mentioned, your business’s value will also be impacted by a number of external factors that need to be taken into account. These include:
- Your position in the market and how great your reputation is.
- Trends in your industry that could impact your business’s projections.
- How competitive your industry is and who your key competitors are.
- Government regulations that may impact how you do business.
- The economy in general.
When it comes to valuing businesses, no two are the same. Depending on your business profile and the industry you operate in, the process for providing a valuation will vary greatly.
For that reason, if you’re planning to sell your business, or are just curious, you should always use an experienced business valuer. Speak to Glaisyers today to find out how we can help you discover what your business is worth.