It\u2019s often said that a business is only worth what someone is willing to pay for it, but there are several methods you can use to reach a sensible figure.<\/p>
A business valuation helps you determine the market value of your business. By using a range of measures, you can understand the economic worth of a business. This is useful for entrepreneurs and small business owners looking to buy or sell a company.<\/p>\n\t\t\t\n\t\t\t\t\t\t\t
Wondering how to calculate a valuation of a company? There are a few different approaches you can take, and we explain more on each of these below.<\/p>\n\n
Adding up the value of all the assets in a business is a good way to work out how much a business is worth. This includes everything from stock and materials to machinery. <\/p>\n\n
Stable, established businesses with a lot of tangible assets are often suited to being valued on these assets. Good examples of businesses like this are those in property and manufacturing.<\/p>\n\n
Bear in mind you’ll also need to subtract any debts or liabilities from your asset valuation.<\/p>\n\n
\nTo do an asset valuation, you need to start with working out the Net Book Value (NBV) of the business. These are the assets recorded in the company\u2019s accounts.<\/p>\n\n
Then, you should think about the economic reality surrounding the assets. Essentially, this means adjusting the figures according to what the assets are actually worth.<\/p>\n\n
For instance, old stock depreciates in value. If there are debts that aren\u2019t likely to be paid, knock those off. And property could have changed in value, so refine those figures, too.<\/p>\n\n<\/div>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\n
Another business valuation method is looking at the value of company shares compared to earnings. <\/p>\n\n
The formula to work this out is called price to earnings ratio (P\/E ratio)<\/strong>. <\/p>\n\n It\u2019s used in the stock market world to work out if a company\u2019s stock is valued at the right price. To work out P\/E value you need to divide stock price by your business\u2019s earnings (net profit<\/a>) by share. <\/p>\n\n But you can also use this formula for your private limited company shares, if it\u2019s not listed on the stock exchange. <\/p>\n\n<\/div>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t This is a simple one \u2013 how much would it cost to set up a similar business to the one being valued?<\/p>\n\n Factor in everything that got the business to where it is today and the costs associated with that. Make a note of all the startup costs, then its tangible assets. How much would it cost to develop any products, build up a customer base, and recruit and train staff?<\/p>\n\n After that, think about savings you could make when setting up. If you can save money by locating the business somewhere else or by using cheaper materials, subtract that from the figure.<\/p>\n\n When you\u2019ve taken everything into account, you\u2019ve got your entry cost \u2013 and a valuation.<\/p>\n\n<\/div>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t This is a complex way of valuing a business, relying on assumptions about its future. The technique is suited to mature businesses with stable, predictable cash flows \u2013 think of utilities companies.<\/p>\n\n \n<\/p>\n\n Discounted cash flow works by estimating what future cash flow would be worth today. You can reach a valuation by adding the dividends forecast for the next 15 or so years, plus a residual value at the end of the period.<\/p>\n\n \n<\/p>\n\n You calculate today\u2019s value of each future cash flow using a discount rate, which accounts for the risk and time value of the money. The time value of money is based on the idea that \u00a31 today is worth more than \u00a31 tomorrow, because of its earning potential.<\/p>\n\n<\/div>\n\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t <\/p>\n\n<\/div>\n\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t Buying and selling businesses can be more common in particular industries, so those industries might have certain rules of thumb that you can use as a guide. They\u2019ll be based on things other than profit<\/a>.<\/p>\n\n \n<\/p>\n\n Let\u2019s look at retail. Rules of thumb here mean that businesses are valued on factors like business turnover, how many customers it has, and its number of outlets.<\/p>\n\n \n<\/p>\n\n It\u2019s a good way for a buyer to value the business based on how they expect to shake things up and get operations to industry-standard.<\/p>\n\n<\/div>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t This brings us round to what we said at the beginning \u2013 a business is worth what someone is willing to pay for it. Intangible assets mentioned earlier could be considered here, with negotiation skill playing a part, too.<\/p>\n\n If the business has desirable relationships with customers or suppliers, it might be more valuable to a buyer.<\/p>\n\n If the buyer doesn\u2019t have a stable team behind them to take the business forward, a strong management team (that won\u2019t jump ship) could also add value.<\/p>\n\n And each prospective buyer might see different risks, variably lowering the value. The key as a business owner is to pre-empt any risks and minimise them.<\/p>\n\n<\/div>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t Enterprise value (EV) looks at the whole company to work out a business valuation. It\u2019s useful for investors and business analysts as it includes business equity and debt as well as market valuation. <\/p>\n\n The formula to calculate enterprise value is:<\/p>\n\n Enterprise value = market capitalisation + market value of debt \u2013 cash and equivalents<\/p>\n\n It\u2019s a formula often used in mergers and acquisitions of companies. <\/p>\n\n EV is also used to work out EBITDA<\/a>, another useful measure for understanding business financial performance. <\/p>\n\n<\/div>\n\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t Beyond economic reasons like buying and selling a company<\/a>, company valuations can also help when:<\/p>\n\n Ultimately, you want to reach a valuation that doesn\u2019t sell the business short. It also shouldn\u2019t overstate what the business is actually worth.<\/p>\n\n It\u2019s tricky to find a balance \u2013 if you\u2019re finding the valuation easy, you might need to revisit your method. It\u2019s a good idea to combine a couple of valuation techniques.<\/p>\n\n<\/div>\n\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t While there are some parts of a business you can value easily, there are always going to be intangible assets.<\/p>\n\n Beyond stock and fixed assets (like land and machinery), which are tangible and have clear value, you should also look at:<\/p>\n\n These intangible assets make it fairly difficult to reach an accurate valuation, but some of the techniques we’ve mentioned in this guide can help you work it out. <\/p>\n\n<\/div>\n\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t Business turnover is when you work out your business income over a set period of time (for example the tax year). This is the number of sales you\u2019ve made \u2013 also known as the \u2018net sales\u2019 figure. However, this mustn\u2019t be confused with profit, which is your earnings after deducting expenses.<\/p>\n\n Calculating turnover is a useful step to understanding the health of your business fairly quickly, but will need to be compared to gross profit and net profit to give a full picture. Read our guide on how to calculate business turnover<\/a> to find out more.<\/p>\n\n<\/div>\n\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t3. Entry cost<\/h3>\n\n
4. Discounted cash flow<\/h3>\n\n
5. Industry rules of thumb<\/h3>\n\n
6. Valuing a business on what can\u2019t be measured<\/h3>\n\n
7. How to calculate enterprise value<\/h3>\n\n
How is a company valuation used?<\/h2>\n\n
What affects business valuation?<\/h2>\n\n
How do you value a business based on turnover?<\/h2>\n\n