Valuing your business – what is it really worth?

Posted February 18, 2016

Valuing your business can be a complicated affair for small business owners. Most of the methods to calculate value have been used for a number of years, however there are so many variables that valuations can often be far wide of the mark.

These are the primary factors that determine business value:

Multiple of profit

Most businesses use a sector-specific formula based on a multiple of net profits in order to determine business value, and your accountant should have access to these.

You can increase the multiplier by building business assets. The following factors of equity-building strategy will increase the multiplier:

Operations not dependent on the owner
Unique system, service or product
Facilities to launch substantial range of new products
Ability to create new distribution channels
Over-arching brand ethos
National scalability

Turnover

As a highly changeable variable, turnover isn’t used as the only factor to determine business value. However, if turnover is high, then a purchaser is more likely to be another business, rather than a private investor. Corporate finance assisted purchasers tend to target companies with a turnover above £10m and profit of over £500,000.

Assets

Asset value tends to come from one of three sources: managed stock, equipment or property. Stock usually only maintains value for a set period while it is viable for sale, but a tangible asset such as a fleet of vehicles or specialist manufacturing equipment would increase (but, not necessarily determine) a business’ value. Desirable premises, unused land or other property assets that could be developed or re-purposed would add most value to a business.

Valuing your business might still me imprecise as it’s ultimately worth whatever someone else is willing to pay for it. However, getting the right information from your accountant in real-time is integral to business strategy and development.

If you want more accounting advice for small businesses, call on the experts at 3 Wise Bears today.