This is a question many of our clients want an answer to! The truth is, it depends on a range of factors and any valuation is only helpful as a guide for planning forward. The ultimate value of a business is the price a willing buyer is prepared to pay for it.
The prevailing economic climate and state of the business’ sector can affect company valuation for better or worse, as can your reasons for selling. For instance, if you need a fast sale due to ill health, the value may be lower than if a sale was taking place under more favourable circumstances.
Valuing a business is a complex process and we are available to support you throughout.
So what are the most common methods of valuing a business?
Price to earnings ratio (P/E)
The price to earnings ratio uses multiples of profit, so this may be an appropriate valuation method if you own a well-established business with a good track record of profits. ‘Price’ refers to the company’s current share price and ‘earnings’ refers to the earnings per share (EPS). The P/E ratio indicates the business’ expected growth in earnings per share in the future.
Discounted cash flow
Discounted cash flow relies on estimating future cash flows and a residual business value, and may be suited to businesses with few assets.
Entry cost
Entry cost valuation involves calculating how much it would cost to build your business to the stage that it’s reached now, including startup and recruitment costs, marketing, and the value of assets. Any savings that could have been made should then be deducted to arrive at the valuation.
Asset valuation
The asset valuation method may be suitable if your business is well established and owns high levels of tangible assets. The Net Book Value (NBV) of assets is calculated and then adjusted to account for external factors such as depreciation and inflation.
Valuation based on industry
Some businesses are valued based on the industry in which they operate. The retail industry is one example, where the number of outlets is an important element for consideration. Industry ‘rules of thumb’ use factors specific to an industry and can provide a more accurate calculation in some cases.
Other considerations when valuing your business
Intangible assets are a key factor when valuing a business. Intellectual property, goodwill, business reputation, and even a premium business location can all add considerable value in the eyes of potential purchasers.
Spotlighting these intangible assets also allows you to improve their value where appropriate. For example, registering ownership of a trademark or patent, building up their reputation even further or improving the condition of their premises.
Please talk to us about valuing your business as this can lead to a range of important considerations and actions.
Call the team now on 0191 374 0300