There are different ways to value a business; however, the main approaches are looking at:
- Profit multiples
- Cash flow
- Similar businesses
The asset approach is where you add up the value the assets which can include buildings, plant/machines, stock, materials and any intangibles assets like trademarks and software. The value of each asset could be the replacement or build cost.
The profit multiple approach is often used for an established business with a financial history.
There is no standard multiple because each industry is different, however, multiple tend to range from 4 to 10 times net profit. Businesses, in industries like high tech and IT typically have a higher multiple than more common bricks and mortar businesses.
And, businesses with increasing profits which is growing quickly will be able to get a better multiple, than a business where profit margins are steady but growth is low.
The cash flow approach is based on future expected profit for a set period of time adjusted for inflation and risk to work out the present value.
The other approach is to establish a comparative value. Find a business which is roughly similar to yours and was recently sold, then obtain the actual value of transaction.
When selling a business think about strategic buyers because they will usually pay more for your business. This could be a similar business looking to get into your local market against a key competitor.
One thing to keep in mind is that your accounts are unlikely to show the real profit because the owner’s wages are not normally included in the accounts for tax reasons.
If your business paid someone to replace you would there be a profit? If not then your business make not have much value.
Image from Flickr by Robert Brook.