Know your worth: 3 Methods for valuing your business
After years of carefully developing an idea that eventually becomes a successful business operation, entrepreneurs begin to consider selling what they’ve built-up either to meet a new challenge or choose to slow down.
However, before taking that leap, it’s important to focus on the business sale process and identify your company’s true worth before signing over your company during the sale stage. Take a look at these three methods for valuing your business during the sale process.
1. Valuing a business on profits
If you want to sell a business as quickly as possible, the valuation should be based on the profits earned by the company. A multiple of earnings: either PBIT (Profit Before Interest and Tax) or EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) are the valuation methods typically used by a buyer, as they are paying a price for the business based on the actual earnings achieved in previous years. It’s a track record of success that can help set the true value of the business without the need for drawn-out negotiations. Are you financially ready to exit your business? Find out by taking our free exit planning
2. Assessing a business on it’s forecasted potential
In the tech industry, it’s more common to see a business’ worth to potential investors or a buyer measured in terms of its potential earnings. American businessman and investor, Mark Cuban, likes to call expensive investments in start-ups and early-stage tech ventures “FOMO: Fear of Missing Out” money, the cost of purchasing or investing in innovation can be dictated by the frenzy of investors circling the venture. Certainly, valuing a business based on its potential is much more lucrative for the business owners.
Certainly, valuing a business based on its potential is much more lucrative for the business owners. After all, the potential could be very attractive to prospective buyers, even in a poorly executed venture. So, if you’re up for a longer negotiation, consider asking potential buyers to value your business based on the potential of the proprietary product or service that your company offers customers.
3. Assessing a business on it’s forecasted potential
Other approaches to valuing a business include:
• A multiple of turnover – particularly used for Software as a Service (SAAS) businesses.
• Price per user – often used in the case of mobile phone companies.
• Net assets of the business – typical for tangible asset-heavy businesses.
• Discounted cash flow – used for businesses generating reliable cashflows.
• The opportunity cost to the buyer of developing equivalent products and services to your
business and gaining rapid market access.
Whether it’s a car or a business, prospective buyers want a smooth transaction and stress-free ownership.
Firstly, you'll need to gather together any financial statements and tax documentation from the last three years and go over them with a professional accountant to ensure all of your correspondence is in order. Other important pieces of paperwork include employee contracts, customer and supplier contracts, details of the property leased or owned, proof of ownership of assets you own and any existing debts the business has.
If you have the ability to remove any borrowings from the books, pay it off as soon as you can. Make sure each shareholder of the business is kept in the loop on your decision to sell. If the current owners of the company are in agreement to sell, paperwork and contracts are in order and the
business is being run well, you’ll have a much easier time finding a motivated buyer.
The journey from company founder to seller is a challenging, but potentially rewarding experience. It’s a time where all of your hard work and dedication can finally pay off. You can fund your retirement or your next project. Take your time and leave your business on your terms.
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