Know your business’s worth so you aren’t short-changed when selling. The way you determine its value will depend on your area of work. Selling your business is a long, difficult process.
Know what it’s worth, streamline the process and find a buyer.
Your first step should be to undergo a business valuation. This will determine your business’s worth. The method(s) you use to find this value will determine the value.
Whether you are onboarding investors or looking to pass on the company to new owners, you should know your value. This will provide transparency to the parties involved. It lets those interested know the strengths and weaknesses of your business too. This helps with making smarter business ideas in the future.
Asset valuation
As the name suggests, asset valuations finds your business’ value based on the worth of company assets. These can include buildings, stocks, equipment (such as technology), as well as brands/subsidiaries. You can effectively find your business’ value by adding up how much these are worth.
This includes current-owned assets, fixed assets and intangible assets. Current and fixed assets are both considered as ‘tangible assets’.
- The value of current assets is short-term, including cash, stock/inventory and other liquid assets.
- Fixed assets are longer lasting, and often considered more ‘secure’. This can include various types of property, such as buildings, plants and land.
- Finally, intangible assets are nonphysical assets. These often refer to intellectual property, copyrights, patents and trademarks.
Start valuing your assets using their net book value, which can be found in the company accounts. This will help you determine any change in value and any business debts owed to or by the company.
Equipment could lose value due to age, while property could decrease in value due to changes in the market. Bankruptcy could also lead to loss of value, with assets often dipping beneath market value.
Intangible assets will be valued based on relevant market research, future earnings from the asset and the cost of replacing it or acquiring a new one.
This creates a base value for your company. Then, you can use other methods to more accurately determine its value.
Price-to-earnings ratio
For additional insights into your company worth, evaluate your business with the price-to-earnings method (P/E). Examine the price of stock, and market trends and anticipate potential investor profit. Usually, you base this on the average share price for the past year. Doing this will help when you are compared to other companies in the same industry as yourself.
This method is often used by larger, publicly traded businesses rather than smaller, private companies. Smaller businesses do not have available stock prices.
Comparable analysis
Comparable analysis is much simpler when compared to price-to-earnings. This is when you face comparison to similar businesses from within your sector/industry. It helps you to find value in the market need for a business like your own, rather than your business’ individual performance.
This showcases how you benefit the industry, so that potential buyers can better understand why they should invest. It also acts as a benchmark, showing the importance of your line of work.
Valuing your business is crucial for ensuring you receive a fair price when selling or attracting investors. A thorough valuation also creates smoother negotiations, transparency and informed decision-making, which is crucial for a successful sale or investment.
Horsfield & Smith are a trusted chartered accountancy, looking to help your business with essential financial services. This includes valuing and selling your business when it’s time for you to move on. We can help you get the best possible price while avoiding any unnecessary stress finances often bring.
