Value and market your business
Common methods of valuing a business
There's a range of ways to value a business. Valuations based on multiples of future earnings and the capitalisation of future cashflows are the most common. There are a number of common valuation methods:
- Businesses with a record of sustainable profits are often valued at a multiple of earnings. Profits are adjusted for any unusual, one-off items to arrive at an estimate of 'normalised' earnings. Smaller businesses are usually valued at a lower multiple than similar, larger companies.
- Mature, cash-generating businesses can be valued in a similar way but based on cashflow. Future cashflows are estimated and discounted - this is known as discounted cashflow. Long-term cashflow is worth less than cashflow due shortly.
- An asset valuation might be appropriate for stable businesses with significant tangible assets - property or manufacturing businesses, for example. Your starting point is the value of assets stated in the accounts - known as the 'net book value'. These figures are then refined to reflect factors such as changes in the value of assets or bad debts.
- The cost of creating a business similar to yours can be used as a basis for valuation. Costs could include buying equipment, employing staff, developing products, attracting customers, and so on. It may be possible to estimate this 'entry cost' as a benchmark of your business' value. Of course, if the cost of entry is low there's little likelihood of you achieving a successful sale.
- In some industries, there are established criteria for valuing businesses, eg by the number of branches an estate agency has.
A potential buyer may use more than one method to get a range of values for your business. In the end, however, any price will be a matter for negotiation.
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