This is a question we’re asked quite a lot! The truth is, a business value will depend on a range of factors and any valuation is only ever a guide for planning purposes. The ultimate value of a business is only ever the price a buyer is willing to pay for it.  

The economic climate and state of the business’ sector at any point can affect a business valuation for better or worse, as can your reasons for selling. If you need a fast sale due to illness, for example, the value may be lower than if a sale was taking place under more favourable circumstances.

Valuing a business is a complex process, but one we can help you with. 

So, what are the most common methods of valuing a business?

Price to earnings ratio (P/E)

The price to earnings ratio uses multiples of profits made, so this may be an appropriate valuation method if you own a well-established business with a good track record of profits. 

‘Price’ refers to the company’s current share price, and ‘earnings’ to the earnings per share (EPS). The Price / Earnings ratio indicates the business’ expected growth in earnings per share in the future.

Discounted cash flow

Discounted cash flow relies on estimating future cash flows for the company, and a residual business value, and may be suited to businesses with few assets.

Entry cost

Entry cost valuation involves calculating how much it would cost to build your business to the stage that it’s reached now, including start-up and recruitment costs, marketing, and the value of assets. Any savings that could have been made should then be deducted to arrive at the valuation.

Asset valuation

The asset valuation method may be suitable if your business is well established and owns high levels of tangible assets. The Net Book Value (NBV) of assets is calculated, then adjusted to take account of external factors such as depreciation and inflation.

Valuation based on industry

Some businesses are valued based on the industry in which they operate. The retail industry is one such example, where the number of outlets is an important element for consideration. Industry ‘rules of thumb’ use factors specific to an industry and can provide a more accurate calculation in some cases.

Other considerations when valuing your business

Intangible assets are a key factor when valuing a business. Intellectual property, goodwill, business reputation, and even a premium business location, can all add considerable value in the eyes of potential purchasers.

Spotlighting these intangible assets also allows you to improve their value where appropriate – for example, registering ownership of a trademark or patent, building up their reputation even further, or improving the condition of your business premises.

If we can help you with producing a valuation for your business, please get in touch. It can be a difficult figure to quantify, but we can use our experience over many years to help.