Step 3: How much is my business worth?
There is no straight forward answer to this. It’s not like selling a car and looking at comparisons although for some businesses that might work (you see, already it’s not straight forward!).
These are possible ways you could value your business for a sale:
- Asset Valuation: it might simply be a question of the value of the business assets if the business is fixed asset driven or the prospect for good future earnings is poor and its greatest value is in property or machinery or other fixed assets.
- Multiplier of net profits: this is done by multiplying net profits’ for example by the last 2, 3 or 5 years (it could be longer although small businesses frequently use a multiplier of 2 or 3 years). So, again, not straight forward.
- Entry Cost: this is a calculation as to what it would cost to create the business you are selling from scratch: e.g. build the same customer base, develop and market the products, source premises, acquire machinery.
- Industry specific: there could be a standard formula for your type of business. For example, retail businesses valuations often relate to turnover.
- Future earnings/discounted cash flow: let’s say you have developed a gizmo that cuts car fuel consumption, has potential to be profitable if taken to market but you do not have the wherewithal to do so. You could value the business by making an assessment of future net profit. The purchaser would then discount that figure (possibly by 15-25%) to reflect the inherent risk the buyer is taking in whether the product will in fact return the forecast profit.
Ultimately, your business is worth what a buyer is prepared to pay. The purchaser might see benefits which could bolster your sale price: for example, your business might be a perfect bolt on to the buyer’s existing business or the buyer might see a way of cutting running costs and thus increasing profit or of increasing turnover through a more diverse and wider growth path.
When valuing your business for sale you need to take expert advice early in the process and speak to both your accountant and a commercial solicitor.
We are happy to give free, initial advice (with no obligation) if you are thinking of selling your business and would welcome your call.