There are many reasons why you may want to value your business. Whether you’re just starting out and looking to secure investment, thinking of selling up, or want to begin to sell stocks and shares, achieving a realistic valuation is key in preparing for your future.
With many things affecting a valuation, you could decide to either choose one particular method of valuation or use a method that encapsulates many. You could even seek the advice of an expert to ensure that the valuation is accurate and incorporates many things.
What affects business valuation?
Many factors affect the value of your business, including the circumstance of the valuation. Are you making a forced sale or declaring bankruptcy, or is it a voluntary sale or a valuation for investment?
All of these things fall under one category — the trajectory of your company. If things are looking bad, expect a lower value, and if your business has plenty of potential, expect something higher.
Other factors that impact business value are:
- The number of staff in employment
- Current and future profitability
- Age of the company
- Financial records
- Intangible assets like reputation, customer loyalty, trademarks, circumstances, business age, strength of the team, type of product, online presence (including social media) Include link to How to Grow a Business on Social Media
- The current market
- Tangible assets: like business premises, equipment, clients and stock
Ways to value a business
1. Price / Earnings ratio (P/E)
Ideal for those businesses who have an established track record of profits, the Price / Earnings Ratio is a way to value a business that can be determined through forecasted or repeated earnings.
By measuring a company’s current share price against its per-share earnings, it’s possible to come up with a number that represents a company’s relative value. This way of valuation is well used by investors and analysts, but also works well for those businesses that want to compare their own progress or aggregate markets.
P/E Ratio = Market Value Per Share ÷ Earnings Per Share
In general, a high P/E Ratio indicates higher earnings growth, compared to similar companies with a lower P/E ratio. However, companies with a low P/E ratio may not necessarily be a bad investment. Mature companies, or those who are new to the stock market, may demonstrate a lower score.
2. Entry Cost Valuation
An entry cost valuation values a business through assessing how much it would cost to start up a similar business from scratch. When valuing a business in this way, you should factor in everything that it has cost to get the business to where it is at this point in time.
Look at startup costs and tangible assets, product or service development, recruitment, and how look it took to build up a customer base. You should even look at the savings you could have made: if moving business location would result in lower outgoings or if changing supply chain could result in lower operating costs. Then, subtract this from your figure to get to your valuation.
3. Asset valuation
If your business has many tangible assets, like inventory, vehicles and equipment, it can be valued on those assets. For example, property development companies or manufacturing businesses will be well suited to asset valuation.
Start by working out the Net Book Value (NBV) — this is the value at which a company reports an asset on its balance sheet.
NBV = Original Asset Cost - Accumulated Depreciation
Accumulated Depreciation = Per Year Depreciation x Total Number of Years
Remember to assess the economic reality that surrounds these assets: what are they worth in today’s market? Remember that whilst some assets, like property, increase in value over time, others, like stock or machinery, will depreciate.
4. Discounted cash flow
Discounted cash flow analysis will aim to figure out the value of an investment today — based on turnover projections. This method of valuation relies on estimates and assumptions — which can notoriously be difficult to pin down. That’s why this method of valuation might be more suited to mature businesses that have stable cash flow and the records to prove it.
Using discounted cash flow, you will estimate what future cash flow would be worth today. You can reach this value by adding dividends forecast for the next decade, plus a residual value.
Remember that you can calculate today’s value of each future cash flow using a discounted rate to account for risk and time value of money. This is based on the theory of time value of money — the money you own now is worth more than the same amount in the future, due to its investment potential.
Getting an accurate valuation
Getting an accurate valuation is vital. Make sure that you have a solid business plan before valuing your business or having it valued.
As well as this, speak to an accountant to get your finances in order, and have a good record of cash flow. You’ll need access to profit and loss statements, tax returns, credit reports and more.
Remember, although there are a lot of hoops to jump through with business valuation, it’s important to trust the process. Once you have a valuation, you’ll be able to minimise risk and be realistic about progress, as well as knowing your worth — and that is priceless.
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