How to Value a Business
Learn all about the different valuation methods here
Whether you are buying, selling, raising investment or just curious to see how your business is doing, a business valuation can provide business owners with a wealth of important knowledge.
This article explains why valuing a business is important, and the factors – both tangible and intangible – that affect a business’ value.
You will then learn about the different methods of actually valuing a business, and which you should use in order to present a business in its best light. For a guide on boosting the actual value of your business, click here.
Why should I value my business?
Even if you’re not looking to sell, valuing a business can be useful in a number of situations:
- Preparing for an exit. A solid business valuation will make your business more attractive to potential buyers, and will help the purchase go through as quickly as possible. You can also use a valuation to decide whether the time is right to sell up, or whether you would be better off continuing to grow it yourself.
- Buying another business. Similarly, an understanding of the valuation process will help you decide whether buying a particular business represents a good investment.
- Raising investment. A strong valuation, backed up by figures, will increase the chances of investors backing your company.
- Comparing yourself to competitors. If a competitor has just received investment valuing them at a certain amount, or gone public, you can use a valuation to see how your own business measures up.
- Going public. You can push up your starting share price with a valuation. Ongoing valuations will allow you to trade shares at a price which reflects the true worth of the business.
- Improving your business. Valuations can be used as a business improvement tool. Regular valuations will show you where your business is doing well or needs improvements, and you can use them to set performance targets for senior staff.
What factors affect the value of a business?
There are five main factors that affect the overall value of a business:
- Why the business is being valued. Context is crucial. If the business is being valued because the owners are desperate for an exit, or there is a declining need for the product or service it produces, then this will obviously affect the business’ worth.
- How the business is being valued. Different valuation techniques can produce vastly different estimates of a business’ worth (see below).
- The assets a business owns. Real assets the business owns, like premises, vehicles and machinery, will push up its value. If a business doesn’t own many tangible assets, the value will lie in its key people and estimates of future profitability.
- The business’ market position. A low market share doesn’t always mean a low valuation – if it has a unique and appealing proposition within its sector, a low market share could represent significant potential for growth. Conversely, a dominant market share would normally suggest a slower or non-existent rate of growth in the future, affecting the business’ value.
- The age of the business. Whilst a business in its early stages might be running at a heavy loss, it may still have a high valuation due to its potential – perhaps it is growing at a spectacular rate, or owns a unique and patent-protected invention. Conversely, a twenty year old business could be turning a regular profit but end up with a lower valuation as it has exhausted its growth potential.