It could be said that valuing a business is as much an art as a science. There is no precise formula that applies to all businesses in all sectors, nor even to all businesses within a sector. Instead, an accurate valuation will depend on consideration of a number of factors.
- The size of the business – larger firms tend to be viewed as less risky and so attract a higher price, even if they are less efficient than smaller competitors
- The prospects for future growth – buyers sometimes pay more for businesses with high growth rates because they repay the investment more quickly. You might consider selling before turnover and profits level out
- Diversification – if you have a wide ‘business mix’ it can affect the sale price, since buyers may only be interested in one area or market
- Customer base – the size of your customer base is important, but so is the quality of your customers and the cross-selling opportunities
- Profitability – although generally the higher the profits, the higher the value, some buyers might prefer a business with areas in which large efficiency savings can be made
- Cashflow and financial management – the size and certainty of cashflow, and the strength of the balance sheet and financial management are all vital factors.
While you will obviously not wish to undervalue your business, it is also important not to overvalue it. An inflated asking price will dissuade buyers, or make them think you are not serious about selling.
Ultimately, the value of your business will be determined by the laws of supply and demand. If there are plenty of willing buyers for your type of business and few sellers, you will get a good price, and if you can allow buyers to set a price through competitive bidding, so much the better.
While a business is only ever worth what a prospective buyer is prepared to pay for it, there are steps you can take to increase the value of your business, and ways to make a reasonable estimate of that value.
Contact HSKSG Corporate Finance to discuss your particular circumstances.
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