How to value a business

If you own a small business, you may be wondering how much it’s worth. So how do you go about getting a business valuation? Here’s how.

If you own a small business, you may be wondering how much it’s worth. So how do you go about getting a business valuation? Here’s how.

Emily Kindness
From the Business team
6
minute read
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Posted 3 MARCH 2021

How much is my business worth?

The reality is, your business is worth whatever someone’s prepared to pay for it. But when it comes to estimating a value, there are a few tried-and-tested methods the professionals will use to arrive at a figure.

How do you value a business?

If you want to value your business quickly, here are a few ways to do it:

  • Asset valuation
    This is where an independent financial advisor tots up the value of everything your company owns. It can be a helpful way of valuing your company if it has a lot of assets, like property, machinery or other gear.
  • Net Book Value (NBV)
    Your company’s net book value is how much it’s worth when you add up all the assets, then take away any debts or liabilities.
  • Price-earnings ratio
    The price-earnings ratio is one of the most common ways of valuing a company. It tends to be used for big companies, as it involves dividing the share price by either future or past profits.
  • Discounted cash flow
    This method of valuation is based on your company’s income, rather than its assets. You see how a company looks set to do long term, then cut that figure to reflect current market values.
  • Previous performance
    If you want to sell your company, another way to determine the price is to base the sale price on the last three to five years’ profits.

What factors will influence the price of my business?

How much you can sell your company for depends on a number of things, including:

  • Performance
    If your company’s growing fast, you’re in a great position when it comes to deciding a sale price. It definitely pays to sell when your business is going great guns – even though that’s often the hardest time to walk away.
  • Timing
    Again, it goes without saying that you should be trying to sell when your business is riding high. And don’t wait until you really need to sell, either. If you’re looking to retire, try to sell before it gets to the stage where you have to accept any offer going.
  • Assets
    Any assets you have will affect your company’s value. Clearly property’s a major asset, or you may own expensive equipment. Most companies don’t own much in the way of machinery, but trademarks, patents, data, contacts and all that know-how you’ve built up will be worth a lot to someone.
  • Income
    How much does your business bring in? Naturally this will have a major impact on its value.

Why would I need to value a business?

There are numerous reasons you might want to sell your company: a change of lifestyle, or the chance to pursue new opportunities, for example. Maybe you just don’t like the work anymore.

But valuing your business isn’t just about selling it. There are other reasons you might want to find out how much your company’s worth. You might want to:

  • Raise equity
    If you’re looking to raise capital, you may find that potential investors want to see a company valuation. 
  • Increase the value of the business
    If you’re looking to grow your company, it helps to know what point you’re starting from. There are always extra ways you can improve profitability.
  • Incentivise the management team
    Having your business valued can be a good way to get your staff behind you.

How can I value my business quickly?

There are a few ways financial advisors will value a business, as outlined above. Which one you choose will depend on what industry you’re in, and which one most suits your company.

I want to sell my company – what should I do?

If you’re serious about selling, here are the first steps you should take:

  • Decide exactly what you’re selling
    Are you selling the business, the assets, or both? Whatever you decide, you’ll need to have a clear plan of action.
  • Check the market conditions
    Is it a good time to sell? How’s your company turnover looking? Are market prospects looking favourable?
  • Hire a financial advisor
    An independent financial advisor will be able to evaluate your company and help you decide exactly how much your business is worth.

What happens if my business isn’t doing well?

Unfortunately, a lower turnover is going to lead to a lower sale price. If your business isn’t doing as well as it could be, it’s worth investing time and energy into improving performance, and selling when the outlook is better.

How to make your business more attractive to buyers

The way to achieve a great sale price is to attract a lot of interest. Here’s how to do that:

  • Sell while the business is growing
    When it comes to selling a business, timing is everything. Many businesses make a loss during their first few years, so you don’t want to sell too early. But you don’t want to wait until profits have peaked, either.
  • Prepare your business for sale
    Don’t wait until you’re sick of running your business and desperate to get out. Even if you’re not planning on selling immediately, it pays to get your business ready. That means getting a top team in place, improving communication, devising a great sales strategy and having a rock-solid business model.
  • Resolve any issues
    All businesses have niggling problems – staffing issues, debts, lease problems, insurance etc. Whatever yours are, be sure to get them sorted sooner rather than later.

Selling your business: things to remember

If you do decide to sell, here’s what to keep in mind:

  • Play the long game
    Selling your company could take a while, so you’ll need to keep performance high throughout the process.
  • Don’t make yourself indispensable
    That sounds counter-intuitive, we know, but you don’t want people to think that the business is nothing without you.
  • Be on top of everything
    Any buyer wants to board a smooth-running ship, so make sure all your paperwork’s in order.
  • Have a game plan
    Even if you’re not planning on selling right now, it’s always worth having a plan in place so you can take advantage if opportunity comes knocking.

How long does it take to sell a business?

How long it takes to sell your company will depend on lots of things, such as what industry you’re in and what the market’s doing. But it may take longer than you think. You should probably account for the possibility of the process taking up to a year in some cases.

Does my company’s value affect my insurance?

If your business suddenly experiences a lot of growth, you may find you need extra office space, staff or equipment. This could well have a bearing on your insurance, as you’ll need to make sure everything is properly covered.

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