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Calculating the value of your business

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Calculating the value of your business is essential if you want to sell it or seek an investor. Even if you don’t plan on selling, it’s still good to know how much your business is currently worth. Once you know, you can then put a strategy into place to increase its market value.

Despite its importance, most small business owners in the UK have no idea what the value of their business is. If you want to have a good exit strategy, you need to start calculating exactly how much your business is worth.

Things that affect the value of a business

There are a number of things that will affect the value of a business. The main factors to consider include:

  • Sale circumstances
  • Tangible assets
  • Age of company
  • Financial history

Firstly the circumstances in which it is being sold will make a big difference. Is it a quick sale due to illness or cash flow problems? If so, you’re much more likely to accept a lower price for the business than you would if you had time to hang around and wait for a decent offer.

If you have a clear exit strategy in place early, it can help you to get a better price for the business if unforeseen circumstances occur.

Assets

Tangible assets are something else you need to factor into the equation. Your business may not be making a huge profit, but if you have large assets such as machinery and property, they will boost the value right up. Many businesses are valued based upon their actual profit potential, rather than assets. Ideally everything should be looked into when making a true valuation. business valueIf your company is still quite new, this can lower the value of the business. This is because newer companies tend to come with more risks. Businesses that have been running for long periods of time will have a more consistent profit margin.

The financial history of your company will also affect how much buyers are willing to pay. Has the business received good profits year after year? Or has there been a decline in recent years? If profits have taken a slump, this will damage the value of the business.

What’s your business worth?

The easiest way to work out your business value is to use net profit multiples. This is a strategy best used to value businesses that don’t own a lot of major assets. It takes your profit after tax into account and multiplies it by what it’s worth to an investor in the sector.

Your accountant is the best person to talk to in order to see what your sector’s multiple currently is. If it’s five times what your net profit is, that’s a fairly easy calculation.

Of course, it doesn’t matter what you value your business at – it’s only ever worth what a buyer is willing to pay. There are many ways you can increase your businesses value. Selling at the right time is a vital part of getting a good price. If a buyer suspects you need a quick sale, they won’t care what your value calculation came up to.

 

 

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About Jemma Porter

About Jemma Porter

Jemma Porter is an experienced content creator who has written for a number of online publications. A self-confessed penny pincher; she's often found seeking out the best personal finance deals.

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