How much is your business really worth?
We have all seen those episodes of Dragons’ Den when hopeful entrepreneurs value their business at tens (sometimes hundreds) of millions of pounds, only for it to be revealed that they have not yet sold any products, or pieced together any form of business plan.
Whilst this approach to valuing a business is on the far end of the scale – and in this case the value has probably been plucked straight out of thin air – it highlights one of the issues business owners face when valuing their own business.
Naturally, business owners have an emotional connection to their business. This can sometimes inadvertently influence how they view the value of their business. Business owners spend most of their life – sometimes even their whole life – building and growing a company. They have seen it through thick and thin, poured their heart and soul into it. Therefore, the importance of an objective and accurate valuation cannot be understated.
Why would you need to business valuation?
The reasons for valuing a business can vary. It could be for tax purposes, funding, a shareholder dispute, a divorce, or because an owner is looking to sell up. However, the need for an independent and accurate business valuation remains critical.
Depending on the business, the valuation process can vary in complexity. In some cases, you might find two different advisors produce two different end figures as the judgement and assumptions behind the calculations in certain businesses can quickly become complicated.
What can affect the value of a business?
There are many factors which can affect the value of a business: management teams, assets, contracts, brand reputation, customer base, location, and sector. Those that fall in the ‘intangible’ category can make the process complex.
At the top of this list is nearly always profit, as ultimately that is what potential buyers want to see.
Over the course of the past year, timing has also played an important role in the valuation process. The value of a business can be hugely dependent on the economy and current climate. As such, many valuations that were completed in the period leading up to the pandemic quickly became out of date.
How to value a business
There are several different approaches to valuing a business. In terms of small or medium sized trading business the convention is that it is valued at a multiple of their recurring profit after adjusting for exceptional items and then adjustments relating to surplus assets and debt from the balance sheet are made.
This multiple varies by industry, size and profitability of the business, with those in certain sectors such as software receiving a much higher multiple.
There are other approaches which can include the value of future cash flows (Discounted Cash Flow model) and net asset value (the cost of all the assets in company’s accounts – for property or asset rich companies where the underlying value of the business is in its assets rather than in its ability to generate profit.
However, putting all this to one side, the value of a business can simply come down to what the buyer is willing to pay for it on the day. If you compare it to selling a property, a house might sell for significantly above what it's worth on paper simply because it ticks all the buyer’s boxes and the chances of something similar becoming available in the near future are slim.
Making your exit a success
Business valuations are as much an art form as they are a science. Working with an advisor who has a solid understanding of your business, your market and a breadth of knowledge in valuing businesses is key. If you’re looking to value your business or you’re considering selling, get in touch with our specialist corporate finance team.