What is my business worth? How to value a small business?

If you're thinking of selling your business, whatever the reason for selling, you'll want to know what it is worth.

A business is only worth what someone is prepared to pay for it, but there are various methods to determine a fair valuation.

What methods can you use to value your business?

Earnings approach

The earnings approach values a business at a multiple of its revenue. Thus, the price/earnings (P/E) ratio represents the company's value divided by its post-tax profits.

For example, if your company is making post-tax profits of £500,000 and you were offered £2,500,000 for it, that would equate to a P/E ratio of 5 (£2,500,000/£500,000).

As a rough guide, you could expect a valuation of between 4 and 10 times the annual post-tax profit. However, there's no standard P/E ratio figure as other factors influence the valuation, including:

• Risk - a small business that relies on one main product or a few key personnel is a riskier proposition than a larger business and will mean a lower P/E ratio.
• Industry - companies within some sectors, like IT and technology, often achieve a higher ratio than bricks and mortar business such as an estate agency or cafe.
• Profit growth - businesses where profits are rapidly growing will command a higher earnings multiple than firms with low-profit growth.

Asset valuation

Asset valuation is a helpful method for established businesses with sizeable tangible assets, such as machinery or property.

The valuation starts with working out the Net Book Value (NBV) of the assets recorded in the company's accounts. The figures are then adjusted to take account of stock depreciation, unpaid debts and changes in value.

Comparison method

The comparison method looks at what companies have sold for in the past.

Different industries have different multiples. Multiplying the latest earnings before interest, taxes, depreciation, and amortisation (or EBITDA) by the sector's multiple provides a guide valuation.

Discounted cash flow

The discounted cash flow method estimates what a future stream of cash flow is worth today. The valuation takes the sum of the company's estimated cash flow over a specific time frame plus a residual value at the end of the period.

This sum is then discounted to provide a current business valuation. The discount is typically in the region of 15-25%.

Entry cost

The entry cost valuation model values a business by estimating the cost of starting a similar business from scratch.

These costs include recruiting and training staff, developing products and services, purchasing assets, and developing a customer base and reputation.

How to value a small business

One or a combination of these methods made be used to determine the value of your business. Other factors to take into account include:

• Econmic climate - the current state of the economy and its impact on different industry sectors.
• Intangible assets - assets that do not appear on the balance sheet, for example, intellectual property and reputation.
• Reason for sale - the circumstances of the sale which may dictate the urgency.

As you can see, valuing a business for sale is a complex process. To achieve the most accurate valuation and best sale price, we recommend seeking professional guidance.

If you'd like a professional valuation of your business, please get in touch.