This is Chapter 3 of Your Complete Guide to Selling Your Business. Check out our Introduction to the Guide go back to the beginning.
How to Value Your Business
The information you collect during the preparation phase will help you to value your business.
Many factors influence the valuation of a business including:
- circumstances of the sale;
- the industry and location; and
- years of operation.
By determining the value of your business you will be able to:
- properly price your business to match the market; and
- determine whether a buyer is offering a reasonable price.
Remember that demand drives price. Any calculation methods are only intended to act as a guide. You should research how much similar businesses in your industry are worth and whether there is a high demand for businesses such as yours.
Two common methods to valuing your business are:
- a multiplier basis (return on investment method); or
- an asset valuation method.
If your business is profitable, you may prefer to use the return on investment method. If your business is fading, but has material assets, and you are eager to sell and move on to the next chapter of your life, you may prefer the asset value method.
These two valuation methods are examples only and intended to provide guidance to help you value your business. Properly valuing a business can be very difficult and you should obtain professional advice from a qualified valuer.
Tip: What is Goodwill?
Goodwill is difficult to define but commonly includes
the business’ non-physical assets, such as:
- customer loyalty;
- brand power;
- business operation procedures;
- staff performance; and
- intellectual property (trade marks and patents).
A business’ goodwill may be very valuable if it has:
- a loyal customer base;
- high-performing employees; or
- a strong brand presence on social media and in your community.
The multiplier basis involves multiplying your annual profit or revenue by a specific number — the “multiplier” or “multiple”. This valuation method is most common for growing businesses. One way to think about a multiplier of profit is that if someone buys your business on a multiplier of 3x profit, they would hope to be able to make back their investment within three years.
Factors that might affect the multiplier that your business is valued on might include:
- the profitability of your business;
- the historic and potential performance of your business;
- the value and type of your business’ assets;
- stability and skill level of your employees;
- the level of market competition;
- the diversity of the products that your business sells; and
- the desirability of your business.
There are many other factors that can affect the multiple that might apply to a business. One of the key ones is the industry that your business operates in – you can look around and see what multiples of profit or revenue similar businesses in your industry have sold for recently as an alternative way to get a feel for what an appropriate multiplier might be. A business broker will also be a good source of information here.
An asset valuation is where you add up the value of all your assets including both physical and intangible assets to set a sale price. It can be hard to calculate a price using this method since:
- The value of an asset may have declined over time, often due to wear and tear, to a nominal value;
- An asset may have a value to your business that is different from its market value if sold separately; and
- It can be hard to value intangible assets such as intellectual property and goodwill, for example trying to put a value on your customer list.
If your business is one where most of the value is in the goodwill (such as brand awareness, customer lists, reputation), for example, a professional services firm, an asset valuation may not really be meaningful and a multiplier method will probably be more appropriate.
You now know what you need to do to determine the value of your business. Read on to see what steps you can take to find your buyer. If you have any questions before you continue reading, you can contact LegalVision’s sale of business lawyers by calling 1300 544 755 or filling out the form on this page.
This chapter was an extract from LegalVision’s Sell Your Business Manual. Download the free 36-page manual featuring the sale process, preparation checklists, and your cheatsheet for negotiating terms.
Was this article helpful?
We appreciate your feedback – your submission has been successfully received.