As a business owner this is a question you should be asking yourself and your advisors regularly. It is important when planning for a sale and also when monitoring the success of your venture.
Business value can be determined by a number of methods, including the earnings basis, which uses either the multiple of post tax profits using price-earnings ratios or a multiple of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation). An asset basis is appropriate in some circumstances and a more sophisticated approach favoured by Warren Buffett is the Net Present Value method based on future cash flows discounted by an appropriate discount rate.
Other than the pure financials there are a number of important factors that determine value;
The state of the economy and banks’ willingness to lend can affect the ability to fund transactions and consequently value. Conversely you may have a business that is counter-cyclical and may be worth more in a recession.
As the owner you may be inextricably linked to the business and your exit would have a detrimental impact on the business and value.
A good management team is key and will encourage buyers and investors to place a higher value due to stability etc.
The geographical site may be significant especially if a buyer has a desire to break into that area and prevent competitors entering.
The business may be niche thus imputing a higher value or have a low value due to market saturation.
However the age old phrase its only worth ‘as much as a willing buyer is prepared to pay for and a willing seller is prepared to sell for‘ actually applies and whilst the maths can provide a guide a good advisor will create a demand for the business and a competition that drives up the price.
Planning to succeed
We can help you with your long or short term planning to sell your business. The earlier you start to plan the more prepared you will be to achieve the best possible return on your hard earned investment.