How Do I Value My Business?

If you are thinking about selling your business either now or sometime in the future, the most important question you’ll be asking is: what’s my business worth?

In fact, you may not even be considering selling. Business owners often want to know the value of their businesses for all kinds of reasons, including to raise equity capital, to incentivise management and to identify areas to improve.

Whatever your reasons for doing so, valuing your business can be a complex process. There is no set formula that you can use, and while some parts of your business may be easy to value, other parts may be very complex.

Despite this, there are various techniques that can be used to value a business. We regularly help businesses in Hampshire and Surrey to value their businesses, and here are some of the strategies we employ when it comes to deciding how to value a business.

Cost to Set Up a Similar Business

One technique to value a business is to work out how much it would cost to set up another identical business just like yours. This is known as the 'entry cost'.

So imagine that you are just starting out now and you want to create a business just like yours again. You will need to consider factors such as developing your products, establishing a customer base, building your reputation, hiring staff, training your staff, buying assets and more. All of these together can provide you with the entry cost, and this is one way to get a value on your business.

Using Earnings Multiples

Another common technique is to use multiples of earnings, which is often the preferred technique for companies that have a long financial history.

In general, when using this technique you may value a business at between five and 10 times its profit, depending on various factors. For example, a newer business will tend to be valued lower because it is more risky and it may rely on one major customer, compared to a business that has been running for longer.

Value of Assets

Another way to value a business is to simply determine how much its assets are worth. This will involve looking at the tangible assets such as property and equipment and putting a price on all of these.

Other Factors to Consider

Although these are common ways to value a business, remember that many other factors come into it. These can include more general issues such as the economic climate at the time, because buyers are more cautious during a downturn.

You will also have to consider intangible assets that are not so easy to put a price on. For example, how much would you value your reputation, trademarks, branding and quality of customer base?

If you are selling, is it a forced sale? If so, this will almost certainly lead to a lower valuation.

And of course you should always remember that the selling price is only as much as someone is willing to pay, so your valuation will ultimately depend on what the buyer is willing to spend.

Seek Professional Advice to Value Your Business

Valuing your business is not something that you will want to do on your own. Not only is it complex, but it can be very time consuming. Instead, always hire a specialist accountant with experience in valuing businesses to help you. We have been valuing businesses in Surrey and Hampshire for years, and we will be happy to help you value your business too.