It can be tricky to know how to determine the worth of a business that you’d like to value or go into business with. Valuing a business has to be a complex discipline as there can be billions of pounds on the line at stock markets, but that doesn’t mean we can’t break it down for you. There are 5 top, simple methods to value a business.
The next question, however, is why would you need to find out the value of a business. Other than the obvious buying or selling an entire business, there are a few more reasons why being able to value a business is a good skill to have. You might need it for investment purposes, to help towards acquiring reasonably priced trade shares in a business, and to re-evaluate management within the company.
Here are the 5 methods to help you value any business that you’d need to.
Measuring a business’s value due to their assets means that they need a sizeable amount of legitimate assets. The term “tangible assets” means an asset to the business that takes a physical form such as, inventory, buildings, land, etc. On the other hand, an “intangible asset” means an asset that doesn’t take a physical form, such as brand recognition, copyrights, trademarks, goodwill, etc.
The net book value of a company is the total assets (tangible or intangible) minus the total liabilities. We ask that you keep in mind they may not take into account inflation, and depreciation or appreciation.
Most of the time, determining the value of a business through their assets, gives you the lowest value of that business. It assumes that the company has no goodwill, which is the determining factor between market value, and the value of the net assets.
2. Price and Costs
If the company you’re looking into has a very good, solid track record of profit, then valuing them by their earnings is a good start. This involves:
- Excluding events and payments which are a one-off from monthly or annual profits
- Working out your normalised profit by adding on the costs and/or gains the company makes after the or being sold
- Completing standard industry practice by multiplying the normalised profits by 3 to 5. The figure you then end up with is the price-earnings ratio.
Along with the same umbrella of price and costs, you can figure out an entry valuation for a business. To calculate this, you’d need to add up all the initial costs. These include the costs of employees, training, the development of services and products, and building a clientele with assets.
3. The Discounted Cashflow
Discounted Cashflow can be used for older, mature businesses that have many investments and have a predicted stable cash flow for the next several years. You’d use this method to see what the cash flow of the future is worth presently.
This is the most complex way out of them all to estimate the value of a business and also does rely on a far few assumptions about the condition of the business in the long term. Click here for a step by step with examples on how to complete this method of valuation.
4. Comparable Companies
Now we’ve gone through the most complex method, one of the much easier, less scientific methods, is comparing the business to that of a similar business that has recently been sold, meaning their value is public knowledge.
5. Rules of Thumb
All different industry sectors have their own ways of valuing the businesses within their own industry. An example of this is, within the retail industry, outfits are typically valued as the volume of customers, a multiple of turnover, and a number of outlets.
Seek Professional Advice
Now here’s where we see the value of an accountant. James Barker, Managing Director of Devonshire Green Accountants Kent advises that “different methodology for a company valuation can yield wide-ranging results, so if buying or selling a business, take care to ensure you and the other party are in agreement about how the business is to be valued.”
We help eliminate the hassle of having to try to work this out all on your own. We can simply help you understand what all these different figures mean and how we got them. Also, we can make help you make sense of all the different figures and explain what they mean for your new business. If you’d like to get in touch, you can call us to book a free consultation with us. Not only can we help with this but we also have many services including, bookkeeping, personal tax returns, VAT and payroll.