If you’re thinking about selling your business, you’re going to need to know exactly how much it’s worth before you begin the process. In this article you’ll find some of the ways you can evaluate your business. We’ll also give you some tips on what you need to do once a price has been set.
The different types of evaluation
Although all businesses are different, there are certain considerations that apply to all business evaluations. The three most common approaches used to evaluate businesses are the asset, income and market-value approaches. Let’s take a look at each of these in more detail.
Multiples of earnings are often used as a business valuation method. This method is particularly suitable for businesses with an established financial history. This approach uses the Price/Earnings (P/E) ratio, which represents the value of the business divided by its post-tax profits.
This equation might seem simple enough, but the tricky part is that there is no standard P/E ratio figure that can be used across all businesses. Certain industries, such as tech and IT, usually require a much higher P/E ratio than businesses such as a bakery. If profits are growing rapidly, the business will also require a higher P/E ratio, and if profits are low, the P/E ratio will need to be lower.
This approach determines the business’s value by using the net-asset value and determining how much it would cost to recreate the business. You can also use the fair-market value of a company’s total assets minus it’s total liabilities to determine how much it would cost to recreate the business.
The tricky part of this approach is determining which of the company’s assets and liabilities need to be included in the evaluation. As with the other two approaches, it’s best to use a professional service to evaluate your business. The last thing you want is to end up selling your business for less than it’s actually worth.
The income approach is a more direct method of evaluation. This approach analyses a business’s revenue streams to predict how profitable it could be. To calculate the value, buyers take the net operating income (NOI) and divide it by the capitalisation rate, which is calculated by dividing the NOI by the current market value.
The market-value approach is when you compare a business’s appraisal value to other businesses of a similar size who are in the same industry and area. This method can be particularly difficult, especially if you own a small business. This is because small businesses tend to be unique and difficult to compare to other enterprises.
Mix it up
Don’t limit yourself to one approach. The best way to go about evaluating your business is to combine all of the above methods, so that you can end up with the most accurate evaluation possible.
The above approaches may sound comprehensive, but there are several other factors that also need to be taken into account when evaluating a business, such as:
- Economic climate
- Intangible assets
- Reasons for sale
- Due diligence
Before you put it on the market
After your business has been thoroughly evaluated and your price has been set, the next step is finding your buyer, if you don’t already have one. Selling a business can get complicated, and you need to ensure everything is in order before you start presenting to potential buyers.
Sort out your financial affairs
Before touting your business to potential buyers, you need to ensure your finances have been audited. You’ll need to be completely transparent with potential buyers, as the slightest discrepancy could lead to a deal falling through.
Seek professional assistance
There are many phases to go through before you sell your business. Determining the correct value, getting your finances in order, getting legal advice, finding a buyer and negotiating a deal are all integral parts of the process and each phase requires a particular set of skills. It’s best to seek professional advice to help guide you through each step of the process and ensure you sell your business for what it’s worth.
Our accounting advisory team can assist you every step of the way. Get in touch with us on +44 (0) 20 7759 7514 or email us on firstname.lastname@example.org.
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