What Is Your Business Worth? And Why Does It Matter?

Why does it matter what your business is worth?

Why does it matter what your business is worth? It may be that you are planning on selling it in the future, either for retirement or to explore other challenges. You’ll also need to know its value if you are planning on raising capital or creating shares. Or you might simply want to put a number on all those years of dedication. Prospective buyers will be looking for a winning combination. One that includes past performance data (to predict future performance), coupled with your recurring revenue streams and other prospects.

All this can seem like a bit of a dark art and creative businesses can be harder to put a value on than some others. Intellectual Property is more difficult to define than more tangible businesses, like a restaurant or an estate agent. But never underestimate its value either. IP can, of course, be extremely lucrative.

Where Do I Start?

There are several different formulas for evaluating a business’s worth. The most common ones are:

Earnings Multiplier – A very common valuation method, Earnings Multiplications means the business annual earnings are multiplied to arrive at a valuation. This is easiest for businesses with an established financial record. This Price/Earnings ratio (P/E) varies from sector to sector and business to business. For instance, a business with faster growing profits would command a higher P/E ratio than one with slower profit growth.

Assets Valuation – If your business has a lot of tangible assets, such as property, an asset valuation will give you a starting point on the value, minus liabilities.

Industry Valuations – Sometimes valuations are based on business sales of others in the same industry.

Future potential – This is how some businesses with little in the way of profits or assets (Uber, Deliveroo) achieve values that are seemingly out of line with any kind of logic. The valuation is based on the expected performance of the business in the future, or a buyer’s ability to leverage the customer base, for example. Even if your business is not a potential unicorn, always be aware that there may be value lurking in your customer base, market position, IP or some other intangible factor that could influence its value.

There are other frameworks for assessing worth, and your accountant will be able to advise you on the best method for your business. Regardless of what method you use to value your business, there are some key areas to refine, if you want to get the best price.

Don’t be Sentimental

While you might feel all warm and fuzzy about your company (after all, it was your brainwave, you built it up from nothing and nurtured it), potential buyers won’t be misty-eyed when assessing its value. So be realistic, but at the same time make sure you have a solid grasp of its real worth and never sell it for less than that.

Extract Yourself FromYour Business

What were we saying about sentimentality? Businesses that can be run by employees will fetch a higher price than those that are still dependent on the owner day to day. At Artisan Accounts, we’re always asking the question “Do you work for your business, or does your business work for you?”  Usually, this is because you can’t maximise your business’s profitability if you don’t have time to strategize and oversee the long-term plan. But myopic management will also make your business less valuable at sale, as potential buyers see how dependent it is on your input. Not a good look.

Make it your focus to set up systems and procedures that allow your business to run without you. You’ll be more profitable now and your business will accumulate more value. 

Get your timing right.

We’ve talked about Earning Multipliers and Asset Valuation. But there are many external reasons that might also affect the amount your company will sell for, such as:

Economic Climate

Reputation

Your Reason for Sale

All the above can impact the price.

• Are you desperate to sell quickly so you can follow up another time-critical enterprise? Then you may have to take less.
• If the economic climate is uncertain (when is it not these days!), you may have to drop your price because there are fewer potential buyers.
• Should your reputation take a hit this could dent your value.
• Equally, if you’re riding high on a PR coup or a suddenly super-popular product, you may sell your business for a significantly higher price than other similar ones could hope to nab. So, timing is everything. Be ready to jump. Which leads us to…

Get Organised

Your first step should be to get all your documentation and finances in order. Put yourself in your buyer’s shoes. If you were looking through a business’s paper work and found irregularities; numbers that don’t make sense, missing reports, etc. you’d probably walk away. So that first port of call is to make sure that all your paperwork is up to date and compliant. Your accountant should be able to help you achieve this if you are not already using appropriate procedures. Cloud accounting and automation will keep your business looking fresh and modern. But don’t wait around, as we discussed in the previous point, sometimes you want to be ready to take advantage of changing winds.

And if you’re not interested in selling your business?

That’s fine but we live in turbulent times and things change quickly. Keeping an eye on the value of your business places you in the best place when considering your options. It will be helpful when it comes to raising funds or selling shares. And maybe it will just make you feel good.

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