Calculating the worth of your business is crucial to determine its financial health and to make important decisions. Whether you’re buying, selling, expanding, or simply running a business, you need to know its value to make decisions accordingly. However, with the different methods of valuation, it becomes complex to choose the right one to know your business’ worth.
In this blog, we’ll look at how to value your business with these methods of valuation and which one suits you the best.
Why do you Need to Value your Business?
By valuing your business, you can get to know its financial status and its potential to make more money. Along with this, there are a ton of benefits of valuing your business:
- It helps you to put a price tag on your business for buying, selling or expanding
- By valuing your business, you can raise equity capital by increasing the prices of shares
- With a clear financial view, you can focus on the underperforming areas of your business
- It can raise your fundings by attracting investors with a realistic estimate of the business value
What Affects the Value of the Business?
There are a lot of factors that can change the value of your business, like the business age, its profitability, assets, etc. Below are some of the typical factors that you need to know before working out your business’ value:
- Human resources: Your business value is highly dependable on the people working in it. If your team is experienced and skilled enough, leading your business towards progress, it can be a great factor to increase its value. So, it’s important to know that the success and longevity of your business depend on your skillset.
- Financial history: If you are expecting a favourable business valuation, you need to have a strong financial history that shows its growth. A detailed history of your business managed cost, evidence of past, present and future cash flow, profits and the debts you have has a significant impact on your business valuation.
- Assets: Whether you have tangible or intangible assets, they have a significant role in the overall worth of your business. Tangible assets like machinery, equipment, premises, furniture and customers can bring a great change in your business valuation. Additionally, intangible assets like your company’s reputation, its trademarks, intellectual property, strengths and relationship with the clients/customers also have an enormous impact on your business value.
- Market: The market also affects your business value. The demand for your services or goods and interest rate can have a great impact on it. conversely, a saturated market with a lot of similar businesses operating in the same location can de-valuate its value.
Methods of Valuation
Now that you are aware of the factors affecting your business value, it’s time to look at how you can value a business. Here, you need to know that there’s no standard way for it. You can test different methods and find out the one which suits you the best to determine the worth of your business. But remember, you can get the true value of your business by knowing what someone is going to pay for it.
You can use one of these methods of valuation to find out your business value:
1) Assets Valuation
If your business possesses large amounts of tangible assets, this method can be ideal for you to know the overall value of your business. Both tangible and intangible assets play an important role in this method.
In the asset valuation method, you first need to find out the Net Book Value (NBV) of your business. To find it you need to subtract the value of your business liabilities from the total assets’ value (both tangible and intangible). Besides, you need to regularly update the records of your total assets along with considering the value of inflation, depreciation, and appreciation to keep the valuation of your assets accurate.
You need to know that this method doesn’t account for goodwill and can’t be favourable for those companies having a reputable name.
2) Industry Best Practice
We can’t take all industries equally. Some might be involved in manufacturing, while others might deal with buying and selling of business and so on. Those industries that regularly practice buying and selling of businesses – like retail – have a certain rule of thumb. These industries consider things other than profit.
This means that they are valued based on the key indicators including business turnover, customer base, and the number of outlets they have.
3) Entry valuation
The entry valuation method is simpler than other valuation methods. It works out the value of a business by calculating how much cost is needed to build a similar business.
Here you need to factor in all the things that are required to establish a business. You need to list down the startup costs, the price of buying assets. How much you need money to employ or train the staff, build a customer base.
After listing down all of these costs, you need to carefully spend money, when you set up a limited company. Like you could save money by getting a cheaper location for your business, etc.
When you are done working out these savings, you need to deduct them with the projected start-up cost. Bravo! you’ve got your business value with the entry valuation method.
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4) Discounted Cash Flow
It is one of the complex ways of business valuation where you rely on assumptions about your business future. This method is only suited for well-established businesses having strong and predictable cash flows for the future.
In this method, you first need to make an estimate of the future cash flow using the present value. Here you apply a discount interest rate around 15% – 25% to cover possible risk and the time value of the money. Time value of money means that a single pound today will be worth more than a pound tomorrow because of its earning potential.
For an accurate estimate of your business value, you need to sum up the projected takings forecast for the coming 15 years or so along with the residual value. If this estimate is larger than today’s investment, it means that this business investment is worth considering.
5) Comparable analysis
The comparable analysis is a simple and popular approach to value a business. It takes account of a business that is currently sold or whose valuation is known by the public. This method provides you with a noticeable value of your business based on the current business worth of your peers or rivals.
Tips to Secure a Good Business Valuation
Valuing a business is never an easy task, therefore you need to consider these tips to get the best business value:
- Make a solid business plan
- Manage your finances properly
- Minimise the risks
- Don’t overestimate the value of your business
- Improve your negotiations skills
- Get our help
Quick Wrap Up
After reading this blog, we hope that you have got a good idea to increase your business’ worth through the different methods of valuation. You can use these methods as per your industry and business type to get the most out of your business. However, you need to remember that a new business doesn’t have significant value. Therefore, you need to put your time into it or take professional help to get accurate insights.
You can ask Cheap accountants in London to make a realistic valuation of your business, or get an insight on increasing the value of your business within the minimum time!
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Disclaimer: This blog provides basic information on the methods of business valuation.