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How to value your business

Getting a realistic valuation is critical, but it's not always something that's easy to achieve.

If you're looking to sell your business, then you'll want to have some idea of how much it is worth. Getting a realistic valuation is likely to be critical, but it's not always something that's easy to achieve.

You may feel that your best option is to consult your accountant, but it's worth noting that such valuations aren't always reliable. Although accountants will obviously be able to study the accounts of your business, they may not have a great deal of experience in buying and selling businesses. This helps to explain why many entrepreneurs in this position are keen to seek out business brokers.

Seeking the services of a broker 

A business broker will have specialist knowledge and considerable experience in this area. It's likely that they will know how other, related businesses have been valued in the past. More importantly, they will also have knowledge of the actual selling prices of other businesses within your sector or location. By consulting an expert in the buying and selling of Canadian enterprises, you should be able to get a realistic valuation.

But how does a broker go about evaluating your business?

Essentially, it can be seen that there are two main areas of consideration, which are known as tangible factors and intangible factors.

Tangible factors 

In some senses, it can seem that tangible factors are easier to identify and consider. They would include the financial history of the business, so that means that a broker would be looking at past, present and future profit levels. They would also be expected to examine the cashflow of the business.

Consideration would also be given to a range of assets, including the business premises, the equipment associated with the business, the stock, vehicles that may be part of the business and the fixtures and fittings.

These tangible factors can often be valued in a fairly simple way, since there will often be standard market rates that can be applied to them.

Intangible factors

Intangible factors undoubtedly provide more of a challenge and it's fair to say that there are a number of approaches that can be adopted here.

So what do we mean by intangible factors?

Typically, people tend to talk about elements like the reputation of the business and the quality of employees. Such factors are clearly critical to the success of any enterprise, but they are also much harder to value. The same can be said when thinking about the quality of products and services that are on offer, or about the level of competition that you face.

Given the nature of some of these factors, it makes sense to use an experienced business broker, who will understand how they should be evaluated. There are a number of formal strategies for evaluating a business and these are often used by individual brokers. They include the following:

Multiple of earnings

This is a method that simply relies on taking the annual post-tax profit of the business and then calculating a value from this figure. Depending upon the individual industry, the broker might suggest multiplying that profit by 5, or by 10, when valuing the business.

Entry cost

This method involves considering how much it would cost to create the business from scratch. Although such a method can be seen as being fair, since it gives due consideration to the cost of obtaining premises, employees and finding customers, it does not necessarily reflect the amount of time and effort that have been required.

Asset valuation

The idea behind carrying out an asset valuation is that the total value of the business liabilities are subtracted from the business assets. The main issue here would be in a business that benefits, or is hindered considerably, by intangible factors. This could distort the valuation to a large extent.

Discounted cashflow

The discounted cashflow method involves calculating a value based on the projected cashflow of the business and is a good approach for companies that are seen as having a lot of potential.

Industry valuations

In some cases, specific valuation methods have been accepted as standard within individual industries. Although this may be a useful indicator, it clearly fails to take into account the individual nature of your business.

The circumstances of the buyer and seller

Finally, it can often be seen that the individual circumstances facing a buyer or seller can serve to increase or lower the value of a business. If one party is in a particular hurry, for example, then this can distort the selling price of the business.

Matt Skinner

About the author

Matt Skinner writes for all titles in the Dynamis stable including, and as well as other industry publications.

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