There’s a good (if not overused) cliche that says “a business is worth as much as someone is prepared to pay for it!”. Whilst that may be true, if you are a business owner, you may like to know a little more precisely how much your business is worth – on paper at least.
Certainly, if you are selling a business, for obvious reasons, you don’t want to be told by a Buyer how much your business is worth, if you don’t know yourself!
So where to start? Preferably with an experienced, independent Valuer. They will often use one, or sometimes two valuation methods (there are at least 5 or 6 to choose from) in order to arrive at a value or range of values. The type of valuation method will depend on the type of business and how profitable the business is, or how much value there is on the balance sheet.
Profitable businesses are often valued on profit-related valuations such as EBITDA (Earnings Before Interest, Tax, Depreciation & Amortisation) or PER (Price/Earnings Ratio), whilst businesses with high valued balance sheet, might be valued on the Net Asset based valuation method, which includes an element of “Goodwill” from any profits generated.
Business valuation exercises are not particularly straight forward as the Valuer will need to make some “normalising adjustments” where for instance, the business owners pay themselves too much or too little compared to normal market rates. Very often, the business owners’ remuneration, perks or other business expenses will be stripped out with more realistic figures added back in, in order to calculate the figures, hence the expression “Adjusted EBITDA” which you might see against businesses listed for sale.
If you are buying or selling a business, it is important to understand that a business valuation exercise in effect calculates a “Price” but the “Value” will ultimately be perceived and determined by the Buyer. In general, “the lower the risk, the higher the value” and vice versa. Of course, an experienced Valuer should be able to look at the risk factors and adjust the multiple to suit but even then, the presence of any off-balance sheet intangible assets such as trade names and patented processes, reputation, key business relationships, niche market placement etc, may all have the effect of increasing the perceived value of a business.
Businesses placed up for sale via a Broker can achieve much higher prices than the “value on paper” as several buyers will have differing opinions on how much the business is worth to them. And nothing drives up Value when there is a competitive bidding environment, when there’s “competitive tension”! Experience shows that from six potential buyers, offers may be double that of others. In other words, if you are selling a business, it’s best to avoid “a buyer of one” and research shows that you are likely to get 30% less, especially if you, the business owner are dealing with the buyer direct.
If you are lucky enough to have a "special purchaser" involved, then they will be buying your business for special strategic reasons and therefore, the value to them, will be much higher than what other buyers might be prepared to pay.
The starting point in all of this, is to at least understand what your business is worth “on paper” and if you are selling, to understand that the calculated “Price” may well be different to the amount that someone is prepared to pay. From finding the right Buyer of course!