How to value your business

| 4 min read

There are a variety of different things that need to be considered if you’re looking to sell your company – one of the most important of which is ensuring that you decide on the right price.

Getting an accurate valuation is something that can be so crucial to anyone in this position, as the price you set (whether it’s high or low) can have an impact on how likely you are to actually make a sale, and whether or not you earn a decent amount of money from it.

Here are some tips to help you to properly evaluate your enterprise and get the most value:

Methods of calculating an organisation’s value

Typically, the multiple of profits is the term used for the most common method of evaluating a business – as well as being the base for other valuation techniques. In most cases, it isn’t too hard to decipher how much a company is worth by using the multiple of profits rule.

To put it simply, it works by profits that a buyer would have from purchasing the business, before applying taxes, interest, and other fees. While it can often vary depending on a number of factors (for example the size of the corporation, the industry you’re in, etc.), this is generally one of the most accurate ways of assessment.

Another method that you could use is entry valuation. This instead requires you to look at how much you would need to spend to setup a similar enterprise, instead of purchasing an existing one. It also takes into consideration the costs of hiring staff, buying assets, and other ordinary business expenses. While not as ideal for smaller companies, it’s still a great option for larger organizations.

Those with a large amount of assets may want to opt for asset valuation instead, which in general looks at the total value of your assets minus the business’ liabilities.

What can you do to increase the value of your business?

Once you have an idea of how much your corporation is worth, you may wonder how you can improve its value to make the most from the sale. A few options include:

1: Fix any issues and upgrade where you can

If there are any small problems, your company may not look as attractive to potential buyers – and this is why spending a little extra cash to sort out minor issues before a valuation can be a wise idea.

2: Reduce risks where possible

A buyer is likely to be less inclined to buy a business with risks – which is why it’s often best to reduce this as much as possible. Detect if there is anything that could lower the value and find out what can be done, since this could make a big difference.

3: Understand what makes your enterprise different from the rest

One of your biggest allies in this is the thing that sets you apart from everyone else. Finding what makes your company unique and promoting it is crucial if you want to get the most value from the sale. This can include being in a prominent location, or particular dealsthat you have with suppliers.

Things that can reduce the value of a business

As mentioned above, one great way to increase value is to fix issues and upgrade your business where possible. Many business owners often overlook:

1: Growth potential

Unfortunately, value can greatly depend on what buyers are willing to pay – and if a business doesn’t demonstrate much potential to grow, they may be less likely to want to pay a high amount.

2: Performance

Much like future potential, the current performance of your company is important to buyers, too. If they see that success has been declining in recent years (or even months), there’s a good chance they won’t be as willing to pay a decent amount of cash.

3: Restrictions

There are several reasons why business owners may have signed contracts with suppliers, but difficulties may arise when selling if said contracts work to restrict the deal/sale in some way.

The bottom line

While you can often try and work out the value of your company alone, it may be a wise idea to ask a professional evaluator to take a look at your business and give you the most accurate and suitable amount of cash to sell for.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
Contact us about this article

We would love to hear what you think about this article and how we could improve it. Please do let us know. However, we shan't be able to reply to your specific questions. If you have a question about a document, please contact us.

Leave feedback about this page