Business Ownership Strategy

How to value your business

The value of the business is usually top of mind for anyone wanting to sell their business. While there will be a multiple and a formula that can be applied to derive a monetary value, that will not usually tell the full story.

One of the best reasons to work with an experienced business broker is that they will help you to understand the ins and outs of your business value. In doing so, they will relate this understanding of value to a broader framework to clarify the actions that you can take, including choosing the most appropriate sale process and timing for you.  

In short, there is usually more than one value for a business.

The Business Value “Now
Often my clients want to know the “Now Value” and I can usually give them a straight answer. The “Now Value” can also have more than one figure and valuation approach, depending on factors such as:

  • the current status of the market and business cycle.
  • whether you have a buyer already.
  • whether a ready buyer exists that is ready to take over your business or integrate it into their own business.
  • how prepared you are for the sale.
  • the current performance and financial position of your business. 
  • future growth opportunities. 

An experienced broker should be able to accurately read the sales environment and give an indication of price and importantly, know about factors that may increase the value of your business, such as reading the willingness of a purchaser to pay more, waiting for the right market conditions or creating competition amongst purchasers.

Don’t underestimate the value of your business!

The “Future” Business Value

For those business owners who have more time to achieve a great outcome, it makes sense to understand how a higher sale value may be gained by “readying” the business for sale first.

To achieve this “Future Value”, some effort and time will be required to make changes to the business in order to make it more attractive to buyers in the future. For more substantial increases in value this effort will typically focus on allowing the business enough time to achieve significant milestones to better demonstrate the full potential, and therefore value, of the business. For example, achieving new sales and / or reaching new markets, which helps create a ‘step-change’ in business value.

There might also be gains to be achieved from more routine enhancements such as improving systems and documentation or paying down debt. For example, it might make sense to clarify terms of trade with customers and suppliers – ideally through contract arrangements. There might also be beneficial improvements from ensuring quality documentation exists for key areas such as employees, internal processes and quality control. Often these improvements will help preserve business value and / or make the business more ‘saleable’ as opposed to increase business value outright. 

Again, an experienced business broker will be able to pinpoint where and how these changes should be applied in order to achieve the maximum price for future market conditions. 

Once understood, the choice is then over to you as the Owner as to whether you sell your business now or make the investment of time and money to strive for a higher sale value over time.

Your Value
In every business sale, there are usually a number of factors outside of the transactional monetary considerations that determine the ultimate sale value. Your preferences after giving consideration to your goals and situation, your family or your staff may affect the price and structure of a sale. For example, you may have a preferred buyer for the business or require that the business continues to operate ‘as-is’, which means that the sale might not be to the highest bidder. While it may be prudent to work on an improved future business sales value from a monetary perspective, it makes sense to consider your options from your personal perspective.

As a business broker, my role is to understand your situation fully and to take all the “values” into consideration. In doing so, my aim is ensure that you have confidence in your decision-making and the sale process to achieve the very best outcome for you.

Valuing Goodwill

For goodwill and / or other intangible assets (e.g. client / customer lists, licenses, patents, brands) to be of value requires those intangible assets to earn something for the business. Most people will see the “Goodwill” value simply as part of the earnings that can be discovered as part of the historical performance and results of the business. To have value over and above that requires demonstrable assets and the earnings they can achieve in the business model – a harder, but not impossible, test. 

I can help with that analysis and explain it in simple terms.

A purchaser and valuer will often use the amount of goodwill in a purchase price as a “common sense check” of their offer price or view on the overall value of the business. Their assessment will often reflect their views on perceived risks and information made available at the time of any discussions (another reason for a high quality information memorandum!). 

High risk businesses will have very low goodwill mulitples (e.g. a multiple of 1 or less), whereas longer established profitable businesses with repeat business and / or strong growth prospects will often have higher goodwill multiples (e.g. multiples of 2 or higher). 

The “art” of any negotiation or valuation is understanding what these positions might be and being able to advocate for the business with a high degree of certainty and credibility.

In the negotiation my knowledge and understanding of goodwill can benefit your position.

What is a good “multiple”

I am often asked – “what is a good multiple for my business” or “what multiples are people paying for similar businesses”? This is a relatively general question and usually can only be answered with a “general” answer. 

In reality, the real answer is very nuanced when it comes to valuing a business. Yes, you will often have a starting point where a relatively standard profit multiple is used – for example, it could be in the 3 to 4 times range (or not!).

However, the real question is what the individual circumstances of the business are and how the business will be perceived by the outside world? There will be views that your business may have increased risk compared to industry peers (and therefore a multiple might apply) or it might be on a growth curve and in a desirable industry (and justify a higher multiple). To get a meaningful answer requires detailed analysis of the business concerned, in addition to current market experience and insight. 

I can help you with these insights by preparing a suitable business appraisal.

Understanding that these multiples range, along with the actions you can take as an owner to improve your position, is central to maximising the value of your business. I can help you with that understanding.

In every case, it is important to make sure you are comparing apples with apples when talking about multiples – see also our comments on ‘How to Value Goodwill’.

Call me to discuss your thinking

Business Value

There is always more than one value for a business. It is my role to simplify the various scenarios in order to achieve the best sales value for you and your situation. 

Business Confidence

A solid and effective business sales strategy hinges on in-depth knowledge and information. Act with confidence knowing that you are making the best of your position and your situation.

Business Experience

My in-depth involvement with many and varied business sales has given me the ability to identify all the possible “variables” that impact the outcome of a business sale.

Business Value

There is always more than one value for a business. It is my role to simplify the various scenarios in order to achieve the best sales value for you and your situation. 

Business Confidence

A solid and effective business sales strategy hinges on in-depth knowledge and information. Act with confidence knowing that you are making the best of your position and your situation.

Business Experience

My in-depth involvement with many and varied business sales has given me the ability to identify all the possible “variables” that impact the outcome of a business sale.