If you’re wanting to attract new investors, sell your business or provide buyers with an objective value, it’s important to establish how much your business is worth.
Understanding the processes involved in valuing a business ensures you select the right valuation method when it comes to determining the cost of your company.
Here are four essential steps to take when valuing a business:
1. Prepare Documents
There are several documents you need to organise before valuing your business. If you already have a buyer lined up, they may want to carry out the valuation independently and you need to be in a position to provide them with the necessary information. Documents you need to organise include:
- Finance statements
- Tangible and intangible assets
- Legal documents
- Registration papers
- Business history and procedures
- Market conditions and analyses
- Sales reports and forecasts
- Employee details
- Business plans
- Supplier agreements and prices
- Customer details
Ensure that all information you supply is up to date and organised in an orderly fashion. This makes it easier to consult documents on an ad-hoc basis. In the case of finance statements, try and supply documents for the past five years where possible.
2. Consider Professional Advice
If you’ve never valued a business before, it may be worth consulting a professional. Experienced accountants offering business advice services can help analyse your finances, market trends, and other factors that may affect the value of your business. Professional accountants also have a list of established clients who may be interested in your property should you be willing to sell. This means you can save on advertising and running costs.
3. Select A Valuation Method
There is no set valuation method for businesses to use and some even choose a combination of methods to determine a final value. Be sure to consult with your buyer or investor to see whether they have a method preference. Some common valuation methods include:
- Comparable analysis: This method uses the metrics of similar companies to determine a business’s value. It involves researching businesses that recently sold or whose value is common knowledge.
- Return on investment: You can calculate your business value based on ROI by dividing your net annual profit by your return on investment and multiplying it by 100. However, you need to first determine what you consider to be a successful ROI.
- Asset valuation: To perform an asset valuation, add up the value of everything a business owns before subtracting liabilities. You need to calculate the business goodwill and depreciation costs of your assets.
- Entry valuation: An entry valuation involves establishing how much it would cost to start up a business similar to your own from scratch. You need to account for all costs – including start-up costs, staff recruitment and training, product and service costs, and asset costs.
4. Estimate Future Profitability
Buyers and investors are more interested in the profitability of your business rather than its current value. You can demonstrate how profitable your business is through finance statements that reflect growth trends and expansion over the years. You can also look at trends for similar businesses if you have limited document proof. Profitability is essential when it comes to negotiating the selling price of your business.