4 essential steps to value your business

It's crucial to determine how much your business is worth if you want to draw in new investors, sell your business, or provide prospective purchasers with an objective value.  A business valuation may also be required if a business partner wishes to exit.

When deciding how much to charge for your business, choosing the appropriate valuation method depends on the individual business’s circumstances, e.g. the asset valuation method may be the most appropriate for a business making losses.

Here are the four crucial stages to follow when determining a company's value:

1. Prepare Documents

Before determining the value of your firm, you must organise a number of documents. If you already have a buyer in mind, they could want to conduct the valuation themselves. Therefore, you need to be able to give them the information they require.  We work with our clients to create this data room to simplify this process for both parties.  Some of these documents include: 

  • Financial statements
  • Legal documents
  • Tangible and intangible assets
  • Registration papers
  • Business history and procedures
  • Market conditions and analyses
  • Sales reports and forecasts
  • Employee details
  • Business plans
  • Supplier agreements and prices
  • Customer details

We create a “data room” to consolidate these documents so that they can be accessed easily and in a timely manner.  When possible, strive to provide papers for the previous five years when it comes to financial statements.

2. Consider Professional Advice

It could be worthwhile to seek professional advice if you have never valued a business before. Accounting professionals with experience who offer business advisory services can aid in the analysis of your finances, market trends, and other elements that could impact the worth of your company. They may also have other clients looking to purchase the type of business you are selling, which can reduce business broker commission and advertising fees. 

3. Select A Valuation Method

There is no standard technique of valuation that organisations must adopt, and some even combine methodologies to arrive at a final value. Business valuation is often said to be more of an art than a science.  Before proceeding, ask your investor or buyer if they have a preferred approach. Typical methods of valuation include:

  • Comparable analysis: This technique assesses a company's worth by comparing its measurements to those of comparable businesses. It entails looking at companies whose worth has recently sold or is well known.
  • Return on investment: To determine the value of your company based on ROI, divide your net annual profit by your ROI and multiply the result by 100. However, you must first decide what a successful ROI is in your opinion.
  • Asset valuation: Before deducting liabilities, add up the value of all the company's assets. You must compute the costs associated with asset depreciation and business goodwill.  Intangible assets can be extremely complicated to value and justify. 
  • Entrance value: An entry valuation entails calculating the startup costs for a business that is similar to your own. All expenses, such as those associated with starting up, hiring and training employees, providing goods and services, and purchasing assets, must be taken into consideration.
  • Discounted cash flows (DCF): An analyst would value the business by discounting the estimated future cash flows.  Firstly, analysing the future cash flows and then selecting a discount rate (usually the cost of capital) to calculate the net present value (NPV) 

4. Estimate Future Profitability

Your company's profitability is more important to investors and buyers than its current valuation. Finance statements that show expansion through time and growth trends can be used to show how profitable your company is. If you have little document proof, you can also look at patterns for businesses that are comparable to yours. When discussing the price of your company for sale, profitability is crucial.  The only exception to this could be a strategic acquisition where a competitor may see your business as a future potential competitor despite not showing profits or generating cash at this point in time. 

When you’re ready to get what you want and truly deserve out of your business, we’re here to help.

  • Are you tired of playing small?
  • Do you want to create real, long-lasting impact for yourself, your family and the community?
  • Are you feeling like there are never enough hours in the day?
  • Do you struggle for clarity about your business performance and direction?

Here are a few ways we can help you

  1. Sign up for our Newsletter where we provide free actionable advice for business owners
  2. Follow us on Linkedin
  3. Work with me and my team privately. Schedule an obligation-free chat if you’d like to work ON your business, not IN it!

The information on this website is general in nature and does not consider your personal situation. You should consider whether the information is appropriate to your needs and, where appropriate, seek professional advice.

Related Articles

Navigating the Financial Waters of Divorce
April 21, 2024

Navigating the Financial Waters of Divorce

The Emergence of Child Maintenance Trusts

Read More Read More
Essential Asset Protection Strategies for Small Business Owners
February 5, 2024

Essential Asset Protection Strategies for Small Business Owners

This article discusses the 5 layers of asset protection available for SME owners.  

Read More Read More