Thread
What is your business worth?
25 times profit sounds nice doesn’t it? The reality is that most entrepreneurs over-value their businesses. As with property – and this won’t be news to you - the reality is that you will only get what somebody is willing to pay. The multiple of earnings (or earnings before interest and tax – EBIT) is the most common valuation method. Valuing assets is another and by that we mean machinery, property and even intellectual property or key staff. And then there’s the discounted cashflow method, often used for tech companies, and based on future projections. So that begs the question: how do you go about valuing a business and why does one method make more sense than another?
25 times profit sounds nice doesn’t it? The reality is that most entrepreneurs over-value their businesses. As with property – and this won’t be news to you - the reality is that you will only get what somebody is willing to pay. The multiple of earnings (or earnings before interest and tax – EBIT) is the most common valuation method. Valuing assets is another and by that we mean machinery, property and even intellectual property or key staff. And then there’s the discounted cashflow method, often used for tech companies, and based on future projections. So that begs the question: how do you go about valuing a business and why does one method make more sense than another?
Events
A comprehensive calendar of events, conferences, seminars, and workshops of direct relevance to this community.
view eventsBlog
Welcome to the editor's blog, where topics relevant to this community will be highlighted and discussed.
visit blog
The very simple answer is that if you have a small business, and by small I can mean a restuarant with £10,000 pw takings then the value of that business in 99% of the times will be between 1 and 2.5 times profits.
It is only when you develop a chain of businesses, for example 10 restuarants that the multiple will increase.
Some people would suggest that a business should be valued based on turnover however this ingores the cost of obtaining that business. Personally I think that most people would agree that it would be better to own a highly profitable business than one with a large turnover but losing money.
Horizon Business Agents www.horizonbusinessagents.co.uk
Absolutely right. Profit is sanity.
There's clearly the issue for the acquiring company of maintaining profit levels post-sale - meaning keeping key employees and their motivation levels high, finding ways to streamline the operation further, retaining the most profitable clients, and finding areas for profitable expansion.
Given the inevitable difficulties of achieving all of that, it's fair to say that they'll be more attracted to you as a vendor if the profit is there at the outset, isn't it. Acquiring a business is risky enough as it is.
What simple things can you do to keep the valuation high and to answer the concerns of potential acquirers then? And are there other valuation methods we should be considering?
Well it is quite a technical answer and one that can't be answered here.
A buyer should always as well consider the value of any assets they are buying, and whether these would need to be replaced in the near future. A tanning business is a good example where regulations in the last year have changed regarding specification of equipment.
Of course a buyer always has an alternative, to not buy a business but start one, they should try and cost how much it would be to establish a new one, including the fact that they may not be making profits in the first year of so.
Buying a business is less risky with much less hassle, a buyer should then compare the premium they would be paying for buying a business. Assuming the business they are looking at is viable, if there isn't much difference then it may tell you that the business on the market is good value.
Horizon Business Agents www.horizonbusinessagents.co.uk