Your Business March 2020 - 108

YO U R B U S I N E S S _ A DV E R T I S E M E N T F E AT U R E

How much is
your business
worth?

There are several methods to working out the valuation
of your business, and it's often more art than science

T

he method you use to value your
business will differ depending
on the type of business you're
selling and the industry in
which you operate. Assets often make up
the bulk of any valuation, from property
and real estate to machinery and
equipment, but you shouldn't overlook
the importance of turnover, profitability
and ongoing contracts as a way of
informing your asking price. There are
also intangible elements to a business
that can provide value, including
relationships, goodwill and location.
The formal valuation process is
usually approached from three different
angles: asset, income and market.

The asset approach

In this case, all of a business's assets are
added up and depreciated accordingly.
Tangible assets include property,
furniture and equipment, as well as
intellectual property such as patents,
trademarks or incorporation documents.
However, as this method ignores
the value of potential earnings it is
therefore often only used for liquidations
or non-thriving businesses.

The income approach

This method involves the calculation of
the current net value of the business's
income. A projection is made in relation
to future cash flow and discounted, based
on the age of the business and future
earnings instability, to determine a value.
A variation of this finds the business's
EBITDA (earnings before interest, tax,
depreciation and amortization) and
multiplying this by a certain factor.
An SME is often valued at between
two and four times its cash flow, worked

YB2020 Dynamis DPS jw3.indd 108

out as EBITDA plus the current owner's
elective salary and benefits. This offers a
rough guide to a company's profitability
and its ability to repay interest or debts.
As up to 80% of a business's purchase
price is often financed, potential buyers
will want to assess how well the cash flow
will support the debt repayment while
offering a good ROI and a decent salary.

The market approach

The most subjective way to evaluate
a business doesn't project cash flow
or potential rate of return but instead
offers an estimate of a business's earning
potential based on current market
demand. Worth is determined by looking
at similar businesses that have already
sold and comparing the sales price to
metrics such as revenue or earnings.
Most business valuations involve a
mixture of all these approaches with a
number of highly subjective variables
thrown in. The trick to achieving the sale
price you want is being able to prove
and document your business's success.
One hurdle to overcome is your
emotional bias. You have most likely
poured sweat and tears into your
business and it may have been in the
family for generations. Putting a price
on something you love is hard, which
is why it's vital to call in professionals.
They will be able to provide expertise
that can help to inform your figure.
For more information about selling
your business, visit businesses
forsale.com/selling-a-business.
To talk about listing your business,
call 020 7324 1930 or email
ioana@businessesforsale.com

11/02/2020 15:03
http://www.forsale.com/selling-a-business
Your Business March 2020

Table of Contents for the Digital Edition of Your Business March 2020
