How Do You Value Your Business?

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Now, let’s talk about the valuation of the business. If you can benchmark your business against others in your industry, that will give you a bit of a guide of how to value your business. There are quite a few tools around. I have a couple of online tools that I like to use that can give you some sort of an indication.

You can usually find out what businesses sell for in a certain industry from a business broker association. If you talk to a business broker, they will be able to give you a guide. There are general rules of thumb for different industries.

But we want to go beyond that. We don’t want industry averages at all, in fact. To me, that would be always be the low-ball. That’s when you just say, “Thank you very much” or “That’s interesting. How did you arrive at that figure?”

It all comes back to thinking about who’s going to buy your business, so you can pitch it in an attractive way. To do that, you have to understand where the market is heading, who the competitors are and how you can project the future cash flows. Because that’s what people are buying. That’s what the purchaser is going to buy. They are buying the future cash flow they will be able to extract from your business to put into their own business.

I mean, take me away from discounted cash flow calculations. It’s not me. Your accountant will be able to help you out on that one. When you do your future financial projections, look at the revenue that you’re going to generate and bring that back to “today’s value” based on an interest rate. That will give you some idea of what they think your business could be worth.

Couple that with what you need from a financial planning perspective and see if there’s a gap. If there is a gap, then we need to examine it more closely to find out what we can do to close the gap so that it doesn’t exist.

The moment that someone gets a sniff that you want to sell your business they are going to say, “What do you want for it?” How do you answer that question?

The most important question you can ask in response is “Why are you interested?” because one of the really important things to do is to understand the buyer. It’s getting into their head and understanding what’s motivating the buyer. Why do they want the business?

No matter what type of sale you are making, even if it’s a family business and there’s a succession happening, you need to understand the successor. What kind of planning is going on in their minds?

Some of the questions you should consider asking them are “Why are you interested?”, “What are you going to do with the business?” and “How do you plan to grow it?”

If they answer all those questions and they’re still saying, “What’s your asking price?”, you can respond with “What do you think it might be worth?”

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How do I Value My Business?

“How do I value my business?” is a question every business owner asks at some time, and it’s complicated because calculating business worth is not quite as simple as just looking at the balance sheet.

The first step in understanding how to value your business is to indeed “run the numbers”, but as a business owner you need to consider far more data points than your accountant does.

To an accountant, the net present value of your business is the only thing that matters. For you, however, and anyone seeking to buy your business, it is the future potential of the business that should be more important.

Knowing the correct value of your business is a key element in developing an effective exit strategy so you can exit the business cleanly and free from stress.

Ultimately if your intention upon exiting the business is to sell it, you’ll want to ensure you get the best price you can, and the only way to be certain of this is by having an accurate picture of the real value of your business.

If you over-estimate the value, you’ll find it difficult to sell, and if you under-value, you will get a bad return. The latter scenario is not what you deserve if you’ve invested a significant amount of time, money and effort to build a successful business.

You need to look at more than just the balance sheet

Accountants look at the value of businesses differently from the way other people do. An accountant’s job really is to help your business look as fantastic as possible. If the only thing you take into account is the net present value of the business as shown on the balance sheet, you could be wiping off up to 40 percent of the real value.

That’s a big chunk of your potential “getting out fund”, and when you also add in other negative impacts like Capital Gains Tax and personal income tax on the return you get, agent’s fees and so on, you really don’t want to be missing out on 40 percent of your potential return.

So instead of just looking at the balance sheet, you need to also consider the positive and negative factors that can have an impact on the real return you get. Remember, the accountant is dressing things up to look good. He or she does not paint the whole picture unless your business doesn’t have any of the following factors, which would be very rare.

These negative factors could make you worry a bit. Really it is up to a buyer or the buyer’s attorney to properly execute due diligence before making a deal on buying your business.

So it’s possible that you might still be able to get an over par value return on your business when you sell it even if it has negative consequences, but please believe us when we say that honesty and full disclosure will normally be the best approach to selling.

Trying to hide negative factors can backfire on you badly, and not only potentially lose you the deal (or result in closing the deal at a value significantly lower than the true value) but you could earn such negative publicity from being “outed” over any kind of scandal that you can’t close any deals with anyone.

The major negative factors include:

  • Ongoing litigation against your company. In fact, in some cases, a court may prohibit you from selling a business while you are in litigation. It may depend on the seriousness of the litigation.Criminal charges brought against you personally don’t normally impact on your right or ability to sell the business, however (obviously if you’re facing personal criminal charges, that’s one of the things you most likely should not disclose to a buyer).
  • Third party construction projects in the near vicinity which might have a negative impact on business. Keeping abreast of such developments is very important. It could be exactly the cue you need in order to know that it’s time to leave the business.

Positive factors that can impact a business valuation

When you are valuing your business, it’s even more important for you to know about the positive factors that will be part of the business valuation.

  • Ongoing litigation where your business is the plaintiff and a successful outcome is anticipated. Usually in that scenario it may be best to wait until the case has been decided, but litigation can sometimes drag on for years, and that’s not always something you want to stick around for.Again, it’s possible that the court might order that you do not sell the business until the matter has been decided, but this is much more rare when you are the plaintiff in the litigation.
  • Increase in Intellectual Property value. If your business develops or holds IP assets, then any increase in your IP should be considered as adding value to your business.
  • Acquisition and/or implementation of new technology. If your business is upgrading its technology or developing new technology, then this also can substantially improve the value of your business.
  • Third party constructions in the local area that might have a positive impact on your business. For example, if you run a restaurant, then the development of a new train station or high rise apartment building near you might result in potentially more customers being available to you.
  • If your business is undergoing expansion, such as if you’re opening new branches and actively growing the business, don’t forget to include this as a factor in valuing your business. If you made the decision to expand, there must have been a good reason behind that decision. It should be a positive business valuation point.

Now it actually is time to look at the balance sheet

Your annual accounts are the main thing a buyer will want to look at, in order to get a picture of the profitability of your business. The purpose of inventorying the positive and negative factors before getting to the accounts is so you can decide which factors you want to mention in addition to the information in your accounts.

If you have more profit potential than your accounts currently reflect, make some kind of documentation that fills in the blanks for the buyer and helps to explain how the business can be a better prospect for the buyer.

It’s not always easy to value a business when it’s your own business. Some people find it hard to cultivate the necessary degree of objectivity. Fortunately it’s easy to get help. You can book a free consultation with The Exit Strategy Group to get the information you need.

It’s completely free, with no strings attached. Knowing the true value of your business will give you the confidence you need to make the most effective decisions.

Make Sure to Value Your Business Correctly

If, as a business owner, I value my business too low, it can have a detrimental impact on my exit strategy. In fact, if I were to calculate the value of my business based on accounting information alone, it could easily wipe of up to 40% of the true value.

There is a lot of information accountants don’t look at when making an assessment. Their main task is to give you the best tax position and make things look cheerful for any public shareholders that may have a stake in the company. They don’t have a strong interest in determining the real value, and in fact with the data they have, they simply can’t.

One of the most common questions we encounter at The Exit Strategy Group is “How do I value my business?“. The key to calculating business worth is to look beyond the obvious factor most people would suggest for how to value your business.

Clearly the raw financial data has some influence on the value of your business. In fact it’s fair to say most of the influence comes from this factor. But there are many other factors you ought to consider as well.

If I chose to value my business purely on financial data and ignored the other factors, I would not have a clear picture of its true worth. Often the value of a business can be far in excess of its present financial position.

What value can be put on goodwill? How about the unique intellectual property your business owns? Then there are the physical assets, and they’re going to be worth something too.

It is myopic indeed to value a business purely on the state of profit and loss, when there are so many things that could influence the real value for better or worse. If you don’t know the value of your business, it puts you at a disadvantage.

Business valuations help prevent business mistakes

Those business owners who do not have an accurate picture of the true value of their business are much more likely to make costly mistakes when it comes to important business decisions or something like planning an exit strategy.

Preventable mistakes are not something you can or should accept, particularly when those mistakes are your own. The simple fact is you can avoid these mistakes quite easily, just by getting an independent valuation performed for you.

The expert business consultants at The Exit Strategy Group can assist you with all kinds of things, including the provision of accurate business valuations you can depend on for decision making.

The Exit Strategy Group has already helped thousands of Australian business owners to improve their prosperity, and we can help you too. It’s always good to have independent insight from a trusted advisor.

If you’re worried about the cost of seeking advice, you should see what the cost is for not seeking advice. But you need not worry anyway, because for a limited time you can get a free consultation, and a free copy of CEO Kerry Boulton’s book, “The Uncensored Truth About Exit Strategies”.

Taking advantage of this offer costs you nothing, and will provide you with valuable information that you can put to practical use. For more information about this fantastic offer, contact The Exit Strategy Group today on 1300 394 878.

Some Questions to Ask For Calculating Business Worth

Some of the things that have an impact on the business that accountants don’t normally investigate include:

  • Is the business currently facing litigation?
    • Is the business expected to lose this litigation?
      • Yes? There will be a negative impact on value.
      • No? There will be a neutral impact on value.
  • Is the business currently enacting litigation against a third party?
    • Is the business expected to win this litigation?
      • Yes? There will be a positive impact on value.
      • No? There could be a negative impact on value.
  • Is the business presently expanding?
    • Yes? There could be a positive impact on value.
  • Are there third party construction plans in the area near your business?
    • Yes? Are they things likely to increase trade when completed?
      • Yes? There could be a positive impact on value.
      • No? There could be a negative impact on value.
  • Are you in the process of acquiring or implementing new technology?
    • Yes? There could be a positive or negative impact on value depending on whether the technology works. Some good technology can still have a negative impact if people fear or distrust it.

These are just some of the many things I need to consider when I want to know what is the value of my business. If you’re presently wondering, “How do I value my business?” the easiest way is to get advice from experts in valuing a business.

Book a free consultation with The Exit Strategy Group today and get the kind of advice you’d happily pay for, absolutely free. When you know what your business is truly worth, it gives you the confidence that comes from making informed decisions.

The Exit Strategy Group can assist in working out how to calculate what your business is worth, how to value your business, business succession planning, how to sell a small business and transition planning.

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