How To Value Your Business

There's an endless number of valuation methods out there in the wilderness for company owners to contemplate...

In fact, devising new ways to value a business is an industry in its own right.

And often, the formula chosen, to put a figure on a business put up for sale, is selected purely to justify the number the owners wish to obtain, rather than to genuinely value the business.

But ultimately - a business (like almost anything else) is worth what someone else is prepared and able to pay for it.

And whenever I'm looking to acquire a business, the valuation figure I reach (and also my overall level of interest) is influenced by a wide range of factors, not just a simple calculation. But that's for another post.

Here are some of the more popular methods...

? Price-earnings ratio

This is the price of the business divided by earnings. A higher ratio at business or sector level, indicates that investors are willing to pay more for the company's earnings, and therefore the company is likely worth more.

? Entry costs

Sometimes used to factor in the barriers to entry, if start-up costs to set up a similar business from scratch are high.

? Discounted cash flow

This reflects future expected cash flow, taking into consideration the risk to the business.

? Asset valuation

This involves looking at the value of the company's assets, both physical assets, like property and equipment, and intangible assets like patents and copyrights.

? Comparables

Similar businesses in the sector which were recently sold might offer comparisons in terms of valuation.

Business valuation is not an exact science. There are limitations with any method you might choose, so remain flexible in your approach.

And be aware that seeking your business valuation from a third party with a vested interest in obtaining upfront fees (such as brokers looking for listing fees) might encourage unrealistic expectations and potentially slow down the sale of your business.

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