Understanding the Value of Your Business & the Current Market

Combining business assets and goodwill

A business is worth whatever someone is willing to pay, but you will need a ballpark estimate of it’s worth. A common method is to combine business assets with business goodwill. Firstly, net assets need to be calculated, taking many factors into consideration, such as:

• The value of your goods or merchandise at cost price
• Assets at resale (depreciated) value
• Accounts receivable
• Money (business profit) in the bank
• Deduction of liabilities (money owed)
• Taxes owed

The above information will provide you with a net asset value of your business. However, your business may include intangibles (goodwill) that also add value, including:

• Good relationship with customers
• Good relationship with suppliers
• Good cash flow and zero debts
• Ideal business location with a long lease
• Loyal, talented staff who intend to stay
• Profitable business systems
• Marketplace advantage of protected intellectual property

In other words, your asking price should reflect present circumstances along with ongoing advantages for the buyer. With so much to consider, an appointment with a Mortgage House Lending Specialist to assist with the your business strategy is worth considering.

The market value approach

When considering selling, it’s worth comparing your business to others that have recently sold. This market value approach provides an estimate of company value, although it’s not unusual for similar businesses in nearby locations to sell for wide-ranging prices. A lot of factors are at play, including the present business climate, demand for your type of business and the quality of products, staff and clients on offer. 

The earning valuation method (profit multiplier)

This method of valuing your business uses your company’s earnings as a starting point, with the figure adjusted to factor in variables that impact value. Annual profit is multiplied by industry standards, for example, food service enterprises usually multiply annual net profit by 2, while retailers multiply annual profit by .75 to 1.5, taking business variables into consideration. Assets, debts, goodwill and market value should all be considered in addition to the earning valuation method.

Assets-only resale value

There are situations where a business is only worth the asset net value. These include businesses in a declining phase and those where the owner is integral to business survival. You won’t be able to claim extra value for goodwill, and should instead focus on maximising the value of fixed assets such as vehicles and equipment. It’s important not to give your business an over-inflated valuation if property values stall, while also understanding that almost all other business assets will depreciate over time.

Showcase your business growth potential

The value of your business can be improved by implementing structures designed for growth. Prospective buyers appreciate tangible growth opportunities and realistic measures to reach financial targets. Strategies include:

• Customer growth opportunities through marketing
• Increasing purchasing frequency with improved customer relationships
• Increasing your average sale by providing a superior product mix
• Boost gross profit by price increases that don’t affect sales volume

Increasing these 4 items by 5% each will result in dramatically increased overall profit, for example, from $120,000 to $145,861 per annum. Improvements to your bottom line are always attractive to buyers, giving you greater negotiating power. Understanding the value of your business and the current market isn’t rocket science, but it’s important to present the brightest picture possible. With so much at stake it’s no time to skimp on pennies, and a small investment in the services of a Mortgage House Lending Specialist can pay big dividends.