How to value your business - checklist

counting money

You might value your business for a number of reasons: to sell the business, to raise equity, to create a market for internal shares or to motivate the management team. If you're valuing the business in order to sell it, you need to arrive at a fair value. Here are all the factors you should take into account

  • Weigh up what sets your business apart. Where the value lies in your business will depend on whether it is a mature, cash-generating business, a stable firm with significant tangible assets, or a new business with good prospects for the future.
  • Consider what skills and experience members of your staff have. If your employees have considerable expertise or unique skills sets, it can add to the value of your firm - especially if they are committed to the business and are tied in with clear employment contracts.
  • Take intangible assets into account. Consider what intellectual property your business has created. The worth of a business can also often rest on goodwill - its relationships with customers and suppliers and their willingness to continue buying from or supplying your business.
  • Find out whether your sector has its own established industry criteria for valuation. For example, an estate agency will take into account the number of outlets it has.
  • Speak to a financial adviser who understands your sector. They will be able to review your accounts and help provide a valuation based on your profit margins and cash flow forecasts.
  • Assess the value of your physical assets. Start with the value of those detailed in the accounts – this is known as net book value – and check to see if you have any other assets you can include.
  • Consider if you can use a price earnings ratio (P/E) – the value of your business divided by its most recent profits after tax. This is only applicable to established firms with a profitable history. If you are using this method, research the value of other businesses in your sector.
  • Weigh up the costs of setting up a similar business from scratch. This is referred to as the entry cost, and includes the cost of purchasing equipment, recruiting staff, developing products and marketing to customers.
  • Consider valuing your business at a multiple of its earnings. Smaller businesses are usually valued at lower multiples than larger companies. Profits are adjusted to include any one-off items.
  • Why are you selling the business? A business that is being wound up or where the owner is being forced to sell is likely to be worth less than a high-growth, profitable business.
  • Remember your business is only worth what the purchaser is prepared to pay. Most business owners value their business too highly, so don't be disappointed if you don't get your original asking price.

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