If you’re buying or selling a small business, first and foremost, you need to know what the business is worth. The issue here is that sometimes what a seller thinks the business is worth, and what the potential buyer thinks, are usually two different figures.
If you’re selling your business, it goes without saying that you want the buyers to see the potential that you do. The worth of a business hinges on how much profit it will make, balanced by the risks involved. But past cash flow, profitability, and asset values are only the starting points. Much harder to measure elements such as key business relationships and goodwill can actually provide a significant part of value.
How tangible are the business’s assets? A business that owns property, machinery or stock-in-hand has tangible assets that will have some resale value. This makes the business easier to value.
Many businesses have almost no tangible assets beyond office equipment; however, their intangible assets may have significant value. Examples are a well-respected brand, customer goodwill, intellectual property (such as patents or protected designs), and potential for growth – Has there been year on year growth since the business was created?
Longevity is also another significant factor -The longer the business has been operating, the better, because it will have a proven track record and cash flow, and possibly loyal customers who provide repeat business.
Valuation techniques:
Fundamentally, a business is worth what someone is prepared to pay for it. To arrive at this figure, buyers use various valuation methods, usually to give a sense of reassurance that they are not paying too much. The main methods are as follows…
To Value your business quickly, first add up your assets, subtract the liabilities, and you have an asset valuation – nice and simple.
As a buyer, you could decide to just buy the assets of a business rather than take over the business as a going concern. This way, any outstanding debts or tax payments are all payable by the previous owner.
The starting point for an asset valuation is the assets listed in the accounts. This is known as the ‘net book value’ (NBV) of the business.
Strong relationships with key customers or suppliers can also be a crucial factor for consideration. For example, if a business holds a licence or distributorship rights across the UK for a product expected to be successful, the business’s value will increase accordingly.
Also important is Management stability. If the owner–manager or other key people are going to leave, the business may be valued down. For example, the profitability of an advertising agency may collapse if a key creative person leaves. Similarly, if key salespeople leave, they may take customers with them. Any written agreements or incentives to retain key employees could add value.
Another consideration is Intellectual property ownership. If the business owns the rights to patents, copyrights or well-established trademarks, these will add value to the purchase price of a business. If you’re selling a patented invention, you can value your business higher than a similar business selling an unprotected product.
Next steps:
• Search online for similar businesses that are for sale to get a feel for the market.
• Determine which method of valuing your business creates the most value for you.
• Review the Intellectual Property Office for steps you can take to protect and enhance the value of intangible business assets such as trademarks and designs. If you’re buying a business, check what intellectual property they have protected.
• Get expert advice. Talk to your accountant or get in touch with us at Robinson and Co about possible valuations of your business.