How to determine business worth?
If you have been running a business for several years and have built it into a profitable enterprise then you may be thinking that you could sell up. Perhaps you have other business ideas you would like to pursue or maybe you’d like to take your hard-earned money and do a bit of relaxing.
Either way you are probably wondering how much your brilliant business enterprise is going to net you when you sell, so you are asking yourself ‘How do I determine business worth?’
Interestingly there is no single answer to this question…instead there are lots of variables to take into account.
Supply and Demand
So firstly, it is important to remember that everything that is sold is only worth what someone is willing to pay for it. If the demand is not high, nor will the price be. There are lots of factors that affect Supply and Demand. If Blockbuster were sold in 1985 it would be worth a lot more than it would have been in 2005!
Finances
A lot of businesses are valued based on Revenue, Profits, Cash Flow or other financial models. Some of these models will look at other businesses in your industry and many will use different multiples to give a value, but unfortunately there is much more to a business than its financial reports.
Assets and Liabilities
If your business has Assets (buildings, stock, fleet etc) then these are certainly going to form part of the business value. Not forgetting to take off the liabilities (loans, debts etc). However, a business is more than the sum of its assets minus its liabilities – otherwise investors would just buy property or vehicles.
Brand Value
If you have a recognisable brand then that in itself can have value. Additionally, if your company has patents or trademarks these will also form part of your business worth.
Customers
If you have regular or retained customers that are loyal to your business this will have a huge impact on the value of your business. However, bear in mind that unless your clients are contracted their value may not be as high as you hope.
Management
A strong team is key to business success and having a great management team in your business will add measurably to the business value.
All of these factors – plus many more – can determine your business worth, but a note of caution at this point, no matter how high your revenue or profits, how many customers you have or how brilliant your management team is…if YOU – the owner – are still integral to the day-to-day running of your business then you will find it very hard to sell your business for anything at all.
My best advice on determining your business worth is to find a great accountant who can advise you, but before you do…make sure you have a business that runs without you…not just for a day, or a week, but forever.
