The most difficult aspect, as well as sometimes, the most challenging aspect in a business for potential buyers is to evaluate a business. It takes time to master how to value a business and some people regard it as an art. Also, always remember that what some people refer to as the “asking price” isn’t actually the purchasing price. Usually, it doesn’t really represent the true worth of the business.
Naturally, the seller’s opinion of the worth of the business usually contrasts with the value the buyer has placed on it, and this is usually because they associate their emotional attachment to the business and take into account the number of years they have spent building it. Unfortunately, this emotional thingy is not relevant and should not be part of the equation.
It is the buyers’ challenge to make an accurate valuation and give a good return on the investment. It is also a challenge for the seller to value his business objectively, and to sell it at a good price at the same time.
3 Important Things You Must Know on How to Value a Business
Prepare Your Business Information
This can be a pretty complex assignment. So if you need help but can’t afford professional assistance, then there is no harm in asking family or friends. Some buyers may like to value your business by themselves, so it would be advisable for you to prepare all the necessary documents. Keep them updated and well-organised as well. This makes you look professional too. Please also prepare asset documents, financial files, and other legal information surrounding your business and your business plans, procedures and profile. Do not forget to include information about your customers, suppliers and staff members.
Decide Whether to Get Professional Advice
It is worthwhile to seek advice from a professional to help you analyse and check your finances, spot trends in the market, and most importantly, sum up your business value. A professional can also tell you what the future profit your business will most likely to bring, which is very important in getting a better price from the buyers.
Choose a Valuation Method
The most concrete thing in asset valuation is putting monetary values on every asset that is on the balance sheet of a company and calculating them. Visible assets such as computers, machinery and office furniture just to name a few, need to be added up. Small start-up businesses may not have many physical assets but you still need to sum up whatever you have. After that, go to the intellectual property (these are things like trademark, patents and incorporation papers etc.) and place a value on that too. Do not forget to include employees and relationships with customers too. All of that needs to be taken into account when valuing a business too.
a) What is business goodwill?
Business goodwills are assets that are not as easy to value because there is no market price placed on it. Forms of goodwill can include: brand recognition, customer loyalty, business operation procedures and also staff performance.
The Market Approach
Another way to value a business is to first of all analyse how much the business can earn potentially, but only base on the demand it has in the current market. Next, you need to assess and work out the competition in your field. Usually the lower the competition is, the higher your valuation can be. Thirdly, observe companies similar to yours and see if they have raised money.
Financial analysts use this method all the time. Income valuation is forecasting the cash flow of a company in the future and giving them a discount based on whether they are new or old in the business. With younger companies, the discount rate for them is larger due to the uncertainty of their earning ability in the future.
Finding out the cost of creating your business can aid you in how to value a business. Some things you must include when estimating the value are: licenses and permits, stock, tools and equipment. Marketing and promotion, product development, gathering and training staff, all need to be considered too. If you bought or leased your premises and have an online presence for your business, include that as well.
Future Profit Estimation
The most important thing in terms of value, as a buyer, is profit that will possibly be made in the future. If you are a seller, selling a high price will be easy for you if your financial statements demonstrate that your business will most likely make great profit in the future.
Estimating the future profit of your business means that a potential buyer will be able to get a rough idea of how much they are likely to make from your business in the future. The future profit of your business can be estimated just by noting down trends relating to your business finances from previous years. There is also no harm in leading an investigation on the trends of businesses similar to yours and comparing it to your business, as the information you find could be useful for placing a price for your business.