What is your business worth? – An introduction to Valuation

Did you know that most business owners can tell you what their house is worth, but not what their business is worth? However, knowing the value of your business before you’re entering a sales negotiation is absolutely critical to achieve the best result for you.

Why do you need a business appraisal?

A business appraisal will provide you with an edge when selling your business. The more knowledge you have and the more presentable your company is, the more likely you will be to sell at a higher price.

The valuation of a business is extremely complex because of the diversity of companies, industries and individual business performance that need to be considered.

The true value of your business is effectively what any potential buyer would be willing to pay at any particular point in time.

Most investments involving the acquisition of businesses are obviously motivated by the desire of the investor to make money.

3 drivers that influence the valuation

The three drivers that generally influence a valuation decision is:

1. The amount of money that can be made from the investment.
2. The level of risk in achieving those goals.
3. The type of work (industry) in which the business operates in.

Some companies have developed intellectual property over years of research and development, packaged it and built it into a recognized brand name. In this case we need a mechanism to not only value what sales are today but also to take into account the past development that will stimulate sales in future years. An investor that buys this company will reap the rewards of that R&D (Research & Development).

Even if we look at one particular industry and take two similar companies (in terms of their sales and profit performance for the last year) we might justifiably pay more money for one over the other.

What other factors can influence the valuation?

Some matters that might lead to a difference in the valuation:

• the degree to which the business relies upon the Directors and Owners
• the existence of a proven financial trading history.
• investments made on R&D
• the existence of long term contracts rather than having to continuously win new work.
• having an easily identifiable loyal customer database
• products that are positioned in a growth market
• a recognisable Brand
• being a dominant player in a niche with a competitive advantage in a wider marketplace.

Then of course there are the intangible reasons:

• better systems in place that are useable for the future buyer
• the degree of perceived professionalism
• negotiating a better deal based on future profits rather than historical performance.
• be a strategic fit to another business

Your business valuation will be less if:

• Your sales and profit history is in a downward trend.
• You are a relatively new start-up company.
• The market you are operating in is in decline.
• Your products and services need considerable investment to continue on-going trading.
• Your earnings are fluctuating.
• There are competitive or industry trends that will make your business less profitable in the future.

How do you deal with the complexity?

Due to the complexity of business valuations, it is best to have an expert by your side who can assist with the calculations and determine positive and negative factors influencing the value.

Ascend Business Partners provide a business appraisal that identifies business risks and opportunities to protect and enhance the value of your business, the key issues that a potential buyer would consider in acquiring/merging the business, and provides insights into the value of the business.

If you want to find out more about business appraisals, please contact us on 03 8794 7777 or ascend@ascendpartners.com.au. You can also book in a free 1-hour “Time to REFIRE” workshop with Greg Johnson here!