Just how much is your company worth, and how is it calculated?
There are various methods to value your business before you begin marketing it for sale and the sector in which you operate and nature of your enterprise will determine how best to value your company.
The basic valuation of your business is the sum of the tangible and intangible assets less any debts and other liabilities. The actual valuation in the eyes of the purchaser is subject to other factors – is it worth paying a premium to remove a key competitor from the market or to expand an existing customer base; does the purchase of your company bring integration or employment problems that act as a discount to the basic valuation?
Many businesses have tangible assets, whether property, machinery or other equipment, which can contribute to the overall valuation or depress it. If, for example, expensive equipment is out-dated and requires replacing, a purchaser will factor into the price the capital expenditure requirement.
Multiples of earnings can also form the basis of your business’ value if it is generating a sustainable profit. The key here is a proven track record. A history of profit growth will give a purchaser confidence in a valuation based on a multiple of profit. A one-off spike in profitability at the time of a sale is unlikely to be regarded as a valid basis for calculating a valuation.
Cashflow can also be used to generate a value, with projected future cashflow discounted and considered less valuable than achieved revenue. Both of these valuation methods often suit mature businesses.
As a starting point, businesses can test their value by considering how much it would cost for a rival to create a similar enterprise. Trained staff, assets, a customer base and well-received products mean a business is well placed to achieve a good price based on this entry-cost valuation. However, in some industries, there is a clear benchmark of value, such as the number of outlets in a chain in a particular sector, which will create a more linear approach to valuation.
Valuations of individual businesses can also be heavily influenced by the consensus opinion about the outlook for the sector in which it operates. A current example is the regional newspaper sector. Public-quoted groups are profitable, cash generative and with profit margins in the mid to high teens, but their valuations have been substantially reduced because the market has little confidence in the sector’s prospects as advertising and readers migrate online.
