Are you aware of how to value a business and do you know what your business is worth? Do you even care what it is worth? After all, you’ve got a rough idea, you’re not thinking of selling in the near future and the profit and loss account looks good.
According to various reports, many business owners don’t know what their business is actually worth. The figures range from 72% to a whopping 98%! But why?
Business owners get tied up in the day-to-day running of the business. When the end-of-year accounts are done they think that’s enough. But is it?
Too many business owners don’t understand the importance of knowing the true worth of their business. Yes, of course, it’s a necessity if you are looking at selling, raising finance, tax planning etc. But it’s important to know your business’s worth so you don’t start seeing your finances through rose-tinted glasses and should an unforeseen situation arise, you get a nasty shock. On the flip side, your business may be worth vastly more than you are aware of, and you could be missing out on opportunities.
If you have a business valuation and the value is less than you expected, you will be able to analyse any weak spots and put processes in place to improve them. If your business turns out to be more valuable than you expected you may be able to retire earlier than planned!
Reasons for knowing the value of a business are:
- Your business partner suddenly wants you to buy them out.
- Divorce or separation
- Planning to maximise the full business potential.
- Helping identify underperforming areas to take action quickly.
- Retirement planning
- Estate planning
- Industry benchmarking
What affects the value of a business.
There are a number of factors that affect the value of a business with key factors including:
- Financial statements
- Past profit and loss accounts
- Future cashflow forecasts
- People
- Strong management team
- Low staff turnover
- Industry sector
- Market trends
- Competitors
- Assets
- Tangible
- Premises, equipment, stock, clients etc
- Intangible
- Trademarks, patents, reputation, growth potential
- Tangible
How to get your business valued
There are several methods to value a business which can be used in isolation or combination. These include:
- Discounted cash flow
- Comparable analysis
- Precedent transaction method
- Industry best-practice
- Entry valuation
- Asset valuation
- Times revenue method
- Price/earnings ratio and other ratios
But beware of trying to value your business yourself. There are far too many stories of business owners needing to sell and not getting a buyer as they have listed the business for too much money. And there are the stories of business owners discovering after a sale they sold for well under market value.
Therefore, it’s vital to get professional help when valuing your business. Using a professional such as Maynard Johns Chartered Accounts to value your business could save you thousands in the long term.
If you would like to know more about our Business Valuation Service, get in touch with us today on 01237 472071.