When starting a business, you focus on launching, taking your product or service to the market with the aim of delivering a profit. What’s next? Do you keep going, seek further investment, diversify or sell it? Before all of this, you must know how to best value your business.
To understand the value of a business you must know what you have to sell. Is it profitable, asset rich or does it own intellectual property? Let’s investigate the aforementioned:
To value a business based on profitability you must consider what the buyer will be looking for, as much as the actual costs that they will incur once the business is purchased. This will generally be at the gross profit level less indirect costs. However, the net profit will almost certainly not need to contain the business owners costs and associated expenses. Your business accountant is possibly one of the best people to determine this value and will be able to assist.
If your business is asset rich and in order to trade it uses and requires fixed assets, such as plant, machinery and perhaps other assets including stock and has work in progress to fulfil contracts before realising the sale, then these need to be professionally valued by an industry expert. Review this value and consider if you would pay the same as the professional valuer. Draw a comparison and set a value.
This is possibly the most difficult area. Your business owns the rights to a patent or a ‘know how’ that creates value that creates sales and a market advantage. This can only be valued by comparing others in your industry. Have other similar businesses sold, what would the market advantage be, what are the likelihood of sales if more cash, marketing and impetus was pout behind the behind? This is the value that can be attributed and on this occasion you would be surprised at the value or mark up. Businesses will pay greater multiples than you would expect for intellectual property (IP). This is also another difficult asset to put a value on.
All in all, you cannot buck the market. The market will determine the value and is best placed to value your business. Never be over eager to sell and always seek professional advice whereby possible.