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How Much Is My Business REALLY Worth?

Monday 17 August 2020

Written by Adam Moody

How Much Is My Business REALLY Worth?

How Much IMBusiness REALLY Worth?

One question Advisors as myself often get asked by business owners is how much do you think my business is worth? The answer is often something like ‘How long is a piece of string?’ or ‘A business is worth what someone is willing to pay in an open market’. Seriously though, there is no hard and fast rule as to what your business is worth, every business is different depending on certain factors which I will cover below. There are also different valuation models that can be used why trying to ascertain the value of a business, with some being quirkier that others. I will also touch on those below. 

How can I maximise the value of my business? 

  • Building the brand 

Get the business name out into the business world and make your business famous for something. Try to find a point of difference between you and your competitors so that your business stands out in the crowd. The stronger the brand, the more the potential business value will grow.  

  • Maksure that the right people are in your organisation 

The team around you will help to cement relationships with key customers and suppliers. The business should not be over reliant on you as the owner meaning that a buyer can come in and know that they are not going to lose a large percentage of the client base overnight.   

  • Make sure that you fully document your systems 

When you are selling a business, a new owner wants to have as much comfort as possible that the structure is already there and they can hit the ground running. The more time you spend putting the structure and systems in place (and most importantly documenting them) the more value you will add when it comes to sell. 

  • Having reports available at the push of a button 

As part of putting systems in place, make sure that your accounting system is set up to produce relevant data at the push of a button. The more detailed the information available is to a buyer, the easier it will be for them to see how well the business has been performing. That may be ration analysis of some sort, looking at performance of salespeople, stock management or something similar. Invest the time in making sure that you have adequate reporting in place prior to considering selling. 

Now that you have spent the time maximising the value, how can you then find out the value of your business should you come to sell? 

The tried and tested methods for most businesses are either based on profitability (trading businesses) or asset values for property companies. There is also sometimes as mix and match for trading companies that own properties for example. For this purpose, let’s assume that we are looking at an owner managed trading company and therefore review how the earnings basis works. 

Most trading businesses are valued based on their profit before tax, interest and depreciation (EBITDA). There are some exceptions, such as professional firms who have recurring income streams which use a multiple of turnover. An adjusted profit is calculated and multiplied by the appropriate Profit/Earnings (P/E) ratio that applies to the relevant sector. P/E ratios are published quarterly based on market data however they are based on large companies listed on the stock market and therefore do not really apply to owner managed businesses. They are therefore deeply discounted to ensure that they reflect the size and type of business that is being valued. 

The above is a good starting point to give a guide. It is also useful to look at similar businesses in your sector and area to see what sort of prices they have sold for in the recent past. This is called the comparison method and a broker would be able to provide some guidance on that front. Different industries have different multiples and within industries the multiples will also vary - take for example a high street retailer, which will typically attract a lower multiple compared to a retail company that does the bulk of its business online. Multiplying your latest EBITDA by your sector’s multiple will give you a guide valuation for your business. 

Many business owners have an idea of what value they would like to achieve when they sell their business in future years. By carrying out this exercise now, it may help you to get a guide as to what the value is today and what you would have to achieve in terms of increasing profitability to achieve your future goals. 

At Raffingers, we offer a free no obligation valuation to all subscribers of the Raffingers Tribe, to subscribe simply click here. 

If you would like to find out more about preparing your business for sale, please get in touch with us. 

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