Key factors that influence the valuation of a business

Key factors that influence the valuation of a business
November 5, 2017 Editorial Team
image of woman taking notes

If you’re thinking of selling your business, then it’s important you know what it’s worth.

But what you value, is not always what the bank will value. 

The worth of a business comes down to how much profit it will make, and the risks involved. If you’re thinking of selling, then it is important you know where the true value of your business lies.

Here are the things a business valuer will look at when assessing your business for a sale:

Finance

The value of a business is dependent on its future performance, so it is essential to look at historical, current and projected profits and cashflow. A potential buyer will also look at how well you control costs and the need for capital expenditure in the near future.

External factors

The state of the economy, including interest rate levels, will be considered, as well as the level of demand in your market. Other external factors that will be considered include:

  • how similar businesses are being valued
  • the number of potential buyers who are looking at your business
  • how many similar businesses are on the market.

Tangible versus intangible assets

A prospective buyer will look at tangible versus intangible assets. Tangible assets include property, machinery or stock-in-hand. Intangible assets, which are just as valuable, include; well-respected brand, customer goodwill, or intellectual property such as patents and intellectual property.

Assets and liabilities

One method of valuing a business includes adding up the assets of a business and subtracting the liabilities. A prospective buyer will look at assets such as property, equipment, debtors and stock-in-hand. They will no doubt look at your future orders, as well as level of debt and other existing liabilities.

People

A team is a reflection of the leadership, so a prospective buyer will look at experience and commitment of key staff, as well as the management’s record of success. Last but certainly not least, they will look at how dependent the business is on your own skills.

Other factors

Circumstances of the sale will be taken into consideration and a forced sale will likely drive the value down. Years of operation will also be taken into consideration because the longer the business has been in action, the better the track record.

At the end of the day the true value of a business is always what someone is willing to pay for it.

 

Get the right advice. At BDH Leaders, we advise you on growth strategy and business structure so you can get the best value. View more information on our business services