What’s My Business Worth? – Valuation Benefits & Methods
Economic climate, state of the business sector, timescale you have to prepare, these can all affect your company valuation. If you need a fast sale, the value may be lower than under favourable circumstances. Valuing is complex with lots of factors to take into account.
A valuation will provide a view of financial health and future capability, inform decisions on increasing margins, help with succession planning and facilitate any funding you need to grow. It helps investors with estimates on value, pinpoints strengths and weaknesses, and informs employee shares and business sustainability. Here is an overview of 5 key valuation methods today.
- Price to earnings ratio uses multiples of profit, an valuation method used for well-established businesses with a good track record of profits. Price being the current share price, and earnings, the earnings per share (EPS). The ratio indicates the business’ expected growth in earnings per share.
- Discounted cash flow relies on estimating future cash flow and a residual business value and may be suited to businesses with few assets.
- Entry cost valuation involves calculating how much it would cost to build your business to the stage it is at now, including start-up, recruitment, marketing, and the value of asset costs. Any savings that could have been made should be deducted to arrive at the valuation.
- Asset valuation method may be suitable if your business is well-established with high levels of tangible assets. ‘Net Book Value’ of assets is calculated, then adjusted to take account of external factors depreciation and inflation.
- Some businesses are valued by virtue of the industry they operate within. Retail is one example – number of outlets is an element for consideration for that industry. The factors are specific to each industry and can provide a more accurate calculation in some instances.
Intangible assets are a key factor when valuing a business. Intellectual property, goodwill, business reputation, and even a premium business location can add value to buyers. Spotlighting intangible assets allows you to improve value where appropriate such as registering ownership of a trademark or patent, building up reputation further via marketing, or improving the condition of premises.
When it comes to valuing your business, there are a range of important considerations and actions to consider, our team of specialists can help. Let’s Talk.