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Valuing your business before selling print Print

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At some stage you may be considering selling your business, or contemplating a succession plan. So it’s important to have an accurate idea of what your business is worth before you decide to sell.

Valuing your business before selling

Choosing your method of valuation

Your business is worth what someone’s prepared to pay for it. And what you’re willing to sell it for. To get an idea of either, it’s important to figure out what area of the ballpark you’re playing in.

There are several common ways you can go about valuing your business.

Assets plus Goodwill

This is a popular way of valuing a business. You add up all the net assets of the business (stock at cost, assets at the depreciated or resale value, any accounts receivable, cash in the bank), and deduct any liabilities (money owed to others, possibly any taxes owed if someone is buying the company shares).

This gives you a net asset value. All the things you are selling that you can touch.

Then (usually) you will want a payment for ‘goodwill’. This is a tricky combination of all your intangibles, such as having:

  • Great relationships with customers and suppliers that will continue
  • Protected intellectual property that gives you an advantage in the market place
  • Brilliant location with a secure long lease
  • Good cash flow and no debt
  • Documented business systems and processes a new owner can pick up.
  • Loyal staff who will stay.

The better these are, the more goodwill you can ask for. And vice versa.

An unofficial calculation is to multiply net profit by the number of years the goodwill effect will last. So if you are making $100,000/year, and you believe your legacy decisions will last another 2 years before the new owner makes changes, then you could ask for $200,000 goodwill (plus net assets).

Of course if the new owner doesn’t think your influence will last 2 weeks, then they will be valuing goodwill at $0. Then the negotiations begin.

Market value approach

This is a comparison of your business to others that have sold lately. If you approach a business broker then they will know if any similar businesses have sold recently, and what the purchase price was. Brokers can be a great help in negotiating and finalising any sale.

The main problem is that similar to house buying, the price at times isn’t dictated by the actual value, but by demand. If similar businesses in a similar industry are selling at price x, it doesn’t mean yours should. You could have better clients, products, staff, and future business opportunities.

It’s worth having a discussion with a broker, your accountant and any other business advisers long before you decide to sell.

Assets resale value

Sometimes the business is only worth the net assets and what they will sell for. Not all businesses can claim goodwill, especially those that are in a declining phase, or the owner is too integral to the business that it wouldn’t survive without them. List all your fixed assets like property, vehicles, equipment, furniture and figure out how much they could be sold for. Remember that assets like property may increase in value over time, while cars depreciate.

How much profit you make x a multiplier (Earning valuation method)

Some industries have ‘profit multipliers’ where you multiply past earning by a ‘magic’ number. This sounds unscientific but there are industry standard multipliers where you look at the average of past profit (say $100,000/year) and then multiply this by 2, or 9, or 17. So your past earnings are used to determine an expected cash flow level, which is then used to predict a sales price.

Sometimes future earnings are multiplied by the magic number. Same process except this time it’s what the business might earn.

Of course this depends on lots of factors; quality of product and service, staff that will stay, good lease, happy customers, long term revenue streams/contracts etc. The better these are, the bigger the number.

Getting advice and help

It’s important to seek advice when valuing your business. Talk to an ANZ Business Specialist, accountant and your business colleagues to ensure you’re going the right way about the business valuation.

A business valuation should be conducted by a professional. They know what they’re doing and they’re more likely to arrive at the most accurate result. Experts can help you understand strategic or market drivers, operational issues and financial factors that will have an impact on your business’ value.

Tools and resources

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