Whatever size or age of your business is, a business valuation is an important process that can show the value of your business and your efforts. Business valuations help improve (small) business owners' financial planning and are valuable for investment purposes. This is why we've compiled this short guide on business valuation.
When does a business owner need a business valuation?
It is recommended to take stock of your business's value regularly. Knowing your business value can help attract investors and investment for new projects, it helps your business grow long-term, shows in which areas you can improve as well as your company's overall financial health, helps determine the price for shares, and can inform your likely future cash flow. Ideally, you should undertake a business valuation yearly.
What impacts the outcome of a business valuation process?
When using a business valuation calculator, several factors will be considered, ranging from tangible and intangible assets to financial statements. The following should be considered:
Tangible and intangible assets
- Tangible assets describe all assets used in the family operations of your company - this could include equipment, property, stock, and clients. Intangible assets, on the other hand, describe a business’s reputation, trademarks, intellectual property, and customer relationships. These are harder to value definitely but are an equally important part of your business valuation method.
Financial statements
- Generally, well-maintained, balanced books showing all cash flow and profit projections, current debts, and managed costs will improve your business's value.
Circumstances of the valuation
- External circumstances such as the business going through eg a process of forced selling. Businesses' values can be decreased in the eyes of investors.
Business staff
- Your employees are key business assets. If your team has a proven track record of success and constitutes of experienced, loyal employees? This is likely to increase your company's value.
Methods for business valuation
There are several business valuation methods. See below for our short guide to four examples.
Entry valuation method: Entry valuation methods are done by identifying the cost implications of establishing a comparable business to your own, starting from scratch. For this, you need to add up start-up costs, tangible asset acquisition, the cost of employing staff, developing products, and establishing a customer base. You then identify potential savings and add them up. Finally, you simply subtract these savings from the start-up costs to arrive at a business value.
Book value: One of the simplest ways of asset valuation for your business is to subtract your business’s total liabilities from its total assets. This identifies what is termed book value, ie the value of shareholder’s equity.
Discounted cash flow method: Using this method entails using cash flow projections and adjusting them regarding the current market value. The present value considers inflation which makes it, while not entirely accurate, more useful for providing a rounded picture than other similar methods (eg earnings multiplier method).
Business rates valuation: Business rates valuation means the rateable value of your property, determined by the Government’s Valuation Office Agency. This method is used by local authorities to calculate business rates bills.
In all of these methods, it is key to not overvalue your business as this can impact the viability of investments in the future.