There are a few methods commonly used to value a business – some suit some types of business better than others. It’s a good idea to consider each method to get a feel for how much your business is likely to be worth on the market. You might already have a rough figure in your head of how much your business could be worth, but it’s advisable to seek professional assistance.
Your lawyer and accountant can help you reach a figure that delivers the best return for your hard work. Your lawyer can help devise the contractual terms of the sale too. It’s also a good idea to use a confidentiality agreement for potential buyers to sign – safeguarding your IP and business practices. There are four main ways to value a business:
1. Earning valuation method
An earning-based valuation method looks at your business’s potential for making money in the future. It values your sales data, overall strategy, existing customer base and supplier relationships as much as physical assets and stock. This is the standard valuation method for businesses that get bought and sold a lot, such as cafés, restaurants, and retailers.
2. Past earnings
Here, a valuer checks your books and uses your past earnings to calculate the likely future profitability of your business. Both revenue and expenses are taken into account before reaching a final figure.
3. Asset-based valuation
Like the name suggests, an asset-based valuation accounts for all the investments in your business. If your business has no goodwill, it could possibly only be worth the value of the assets. Determining the resale value of your business’s fixed assets such as machinery, equipment and vehicles is easier than you might think. Some assets – such as property or a classic vehicle used for promotional purposes – are likely to be worth more over time. Others – such as equipment and machinery – are likely to decrease in value over time.
Your accountant can help you calculate depreciation and advise you on the likely market value of your bigger assets. You can also research prices yourself by checking Trade Me or similar auction sites. For your premises, it’s generally a good idea to get a professional valuation. This will determine the current market value and uncover any hidden issues. When you are ready to sell your business, talk to your lawyer. Your lawyer can help you draft a confidentiality agreement for potential buyers to sign – safeguarding your IP and business practices. Ask your experts to note any weaknesses they see in your business.
Due diligence isn’t just for potential buyers – take a good look at your business and try to remedy any problems before putting it on the market.
4. Going concern
For most business sales, you will sell the business as a going concern – which is net assets plus goodwill. A going concern valuation method lists your net balance sheet value of all business assets, subtracting the value of all its liabilities. Goodwill is simply a blend of all the little things that give your business greater value overall. Individually, each benefit could be hard to put a price on, but together they boost the desirability and total value of your business. Your goodwill is likely to include:
- Location - having a desirable location is a huge advantage to any business.
- Existing relationships with customers and suppliers - a future owner benefits from your hard work by picking up loyal customers and other people that want to see the business succeed.
- Intellectual property (IP) – innovation, knowledge and creative thinking such as patents or copyrights.
For example, you might have $300,000 worth of plant and equipment, plus $100,000 as goodwill.
How to increase the price for your business
You might be surprised at the difference a lick of paint and improved signage makes, but it’s more than just the aesthetic. Consider these points when looking to boost the value of your business:
- Growth – can you prove your industry is thriving? Show potential buyers that your business is set up to grow.
- Tangible assets – showcase the physical assets your business comes with, such as equipment, stock, and vehicles.
- Intangible assets – the stuff that’s hard to put a price on, including goodwill and any IP included in the sale.
- Customers and suppliers – inheriting a wealth of happy customers and suppliers is a huge benefit for potential buyers.
- Competitors – demonstrate how your business fares against the competition/your market share.
- Riskiness of the business – it’s up to you to show that the future of the business is secure.
The next steps
You might already have a rough figure in your head of how much your business might be worth, but it’s best to seek professional assistance. Your lawyer and accountant can help you reach a figure that delivers the best return for your hard work. Your lawyer can help devise the contractual terms of the sale too. It’s also a good idea to use a confidentiality agreement for potential buyers to sign. Ask your experts to note any weaknesses they see in your business. Due diligence isn’t just for potential buyers – take a good look at your business and try to remedy any problems before putting it on the market.