A helpful guide to help you value your firm in a pinch
If you’re not planning an exit, you might think it is unnecessary to estimate the value of your business. However, understanding the potential value of your business not only prepares you for its eventual sale but also allows you to monitor the progress of your venture.
There are many ways to value a business, and it is important to obtain a good estimation early on. This will help you to prepare before the time comes to eventually sell your business. Ultimately, you will set a price for your company in your mind based on what it’s worth to you.
However, you must keep in mind that a business, just like any asset, is only really worth what a buyer is willing to pay for it. So, when working out how much your business is worth, you will need to look beyond your own valuations and consider other factors that will determine the price that you could receive.
Whilst the price of a business is often based on the multiple of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization), which gives a truer reflection of the earnings of the company, resulting in a higher overall value. It is important to remember that the value of a business is not merely determined by mathematical calculations and number crunching.
Prospective buyers make judgements about market position, quality of assets, growth potential and associated risks of the business. Careful planning to address these issues is essential if you are aiming to increase the value of your business and reap the rewards of your venture.
Business valuation timing
To get the best price possible, a key issue you should concentrate on is timing. The general state of the economy and the sector your business is in can have a significant impact on the price it will be able to command. It’s easier for a buyer to fund a purchase when their own business is doing well, interest rates are low and banks are keen to lend. The decision from a buyer could also be influenced by the current tax environment and any forthcoming changes.
Supply and demand
The largest influence on the price you will get for your business is the Law of Supply and Demand. If, when you sell, there are plenty of willing buyers with capital in place and only a few sellers, you are likely to get a good price.
If, however, the converse is true, you will be unlikely to get a good price or, even worse, you may find you cannot sell at all. Competition between bidders can also inflate the final selling price.
Business growth potential
Buyers will pay more for businesses with a solid potential for future growth, as this not only makes the company a more attractive prospect but also helps them to recoup their initial investment more quickly. Your business will be worth a lot more if you aim to sell when profits are increasing and look likely to grow further still.
Consider the impact of sales cycles or seasonal fluctuations in your business. If you have a full order book at a particular time of year, it might be helpful to undertake the sale of your business around this time.