Services:
Acquisitions and Disposals
If you’re thinking about selling your business, attracting investment, or getting involved in a merger or acquisition, one of the most important steps you’ll need to take is figuring out the value of your business.
It’s not just about a number on a balance sheet—it’s about understanding where your business stands today and what it could achieve in the future.
Let’s break it down in simple terms, so you can get a clearer picture of how business valuations work and why they matter.
What Is a Business Valuation and Why Does It Matter?
A business valuation essentially tells you how much your business is worth in monetary terms. But it goes beyond that. It’s a tool that helps you with a whole range of decisions, from strategic planning to tax planning and even preparing for succession planning when it’s time to hand over the reins.
If you’re offering shares to employees as part of their compensation, having a current, accurate valuation can set realistic expectations for everyone. Plus, it helps you ensure that you’ve got the right insurance coverage to protect your business from unexpected losses.
So, whether you’re getting ready to sell, seek funding, or simply plan for the future, knowing the value of your business is a critical step.
4 Business Valuation Methods — Simplified
Now, let’s look at four common methods for valuing a business to help you make more informed decisions. Each method has its strengths, and what works best for you depends on your business type and situation.
1. Asset-Based Valuation
Asset-based valuation focuses on the company's net asset value (NAV). This one’s straightforward as it focuses on the value of your assets minus your liabilities (debts). It’s ideal for businesses with a lot of tangible assets, like property or machinery. This method also works well for older, established companies looking to streamline operations or divest non-essential assets.
There are two ways to approach this:
-
Going Concern: This assumes your business will keep running and values assets accordingly.
-
Liquidation: This assumes your business will close, and assets will be sold off, usually at a lower price.
It’s a practical method, but it doesn’t always capture the true potential of businesses with intangible assets (think: brand value or customer loyalty) or those in fast-growing industries.
2. Market Value Valuation
This approach compares your business to similar businesses that have recently sold. It’s like checking property prices in your neighbourhood before selling your home—it gives you a rough idea of what your business could fetch on the open market.
If you’re looking to sell or merge your business, this method is super useful. However, if you’re in a niche industry or a rapidly changing market, finding good comparisons might be tricky. In those cases, the valuation might not be entirely accurate.
3. Income-Based Valuation
Here’s where things get a little more future-focused. Income-based valuation looks at your business’s potential to generate future income. It’s often considered the most realistic method for businesses with high growth potential, like start-ups or tech companies.
There are two main ways to do this:
-
Discounted Cash Flow (DCF) This method estimates your future cash flow and then "discounts" it to its present value. It’s detailed but requires accurate forecasting.
-
Capitalisation of Earnings This simpler method divides expected earnings by a rate (the capitalisation rate) to estimate your business’s worth.
This approach can give you a solid idea of your business’s future value, but it’s not without its risks. Forecasts can change due to things like economic shifts or new competition.
4. EBITDA Valuation
If you want a method that’s easy to understand and apply, the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) approach is for you. Essentially, this method looks at your business’s earnings and applies a multiple to it, which is based on industry standards and market conditions.
It is used most in industries where the benchmark multiples are well established and can be verified by a third party, so it provides a less subjective means of valuation compared to methods such as DCF.
However, this method doesn’t account for future growth or potential downturns, so it’s more of a snapshot of where your business stands today.
5 Easy Steps to Start Valuing Your Business
Now that you have a basic understanding of the valuation methods, here are five steps to help you get started:
1. Gather Financial Statements:
You’ll need at least 3-5 years of profit and loss, balance sheets, and cash flow statements.
2. Forecast Future Income:
Using your financial data, project your future earnings. Think about market trends and consider different scenarios.
3. Choose the Right Valuation Method:
Choose the one that best fits your business, and don’t be afraid to combine methods for a more accurate picture.
4. Benchmark Against Similar Businesses:
Look at other companies in your industry to compare valuations and validate your assumptions.
5. Seek Professional Advice:
Valuing a business can get complex, so reaching out to experts can ensure you’re on the right track.
Ready to Value Your Business?
Determining the true value of your business requires a deep understanding of the different valuation methods and your company’s unique circumstances. Whether you’re planning to sell, seek investment, or make other important business decisions, a well-informed business valuation can help you achieve your goals. If you are thinking of exiting your business, download our free Exit Planning Handbook to help you navigate through the process.
