How much is my business worth?

Even if you don’t plan to sell your business in the near future it’s important that you understand how your business would be valued by a prospective purchaser:

• The things that make a business valuable to someone else will make it more controllable, profitable and scalable for you
• Getting a business ready to sell takes years – if you just wake up and decide to sell it you will probably not get what it could be worth. If you know what buyers are looking for then you can start working on those things right now

What things make your business more or less valuable?

Assets

Fixed assets like machinery or buildings, current assets like stock and money owing from customers, and amounts owing to the bank (and you)

Cash flow

• Often buyers will use a rule of thumb such as a multiple of turnover or profit to arrive at an initial price. This is simple and is based on a typical business in your industryThis multiple is a way of estimating the actual cash that the business will deliver based on industry norms for margins, stock, debtor and creditor levels and the quality of earnings (see below). However, if your business isn’t very good at turning turnover into profit into cash then the value (and your current lifestyle) will sufferThere will be adjustments for paying someone to replace you and also any expenses you put through the books

Quality of earnings

• Not all future profit (or cash flow) is the same. The more uncertain it is that current levels will continue into the future, the lower the selling priceIf your income is mainly from projects then there is a high risk that this will not continue indefinitely – or at least, that cash flows will be volatileIf your income is mainly from repeat work or maintenance then this will be seen as more stable and certain and so lower riskIf your income is mainly from long-term contracts then this is the lowest risk of all and the buyer can be confident that it will continue at current levelsIf a large proportion of income comes from a small number of customers then this is also a risk

Reliance upon the you the owner

• If a significant part of the work is done by you, or if key processes rely upon you, then this will seriously reduce the value of your business to a buyer
• If processes are not documented and systemised so that the business can be operated by and with anyone with the appropriate skills then this will reduce the value
• If you can’t go on holiday for 3 months and come back to a working business then it’s probably not worth much to anyone else

Finally

• A buyer will not pay for improvements or efficiencies that she herself will have to implement after the sale
• A buyer will not pay for unsubstantiated growth forecasts!

Understanding (and addressing) these factors is the basis of the Value Improvement Model©, a unique and effective way to make owner-managed businesses more profitable and controllable.  Click here to see how the VIM rates your business.


If you want a more specific and detailed valuation with a view to selling soon I recommend you try Plan B Associates


They offer those thinking about selling their business a free, no obligation consultation aimed at answering the initial key questions most owners have – Is it the right time for me to sell? How much is my business worth? How do I find the right buyer? How long will it take to complete a deal? What service does a broker provide? Is using one right for me?
You can email them on info@planbassociates.co.uk or call 01483 440781