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Men and women moving an abacus around

How to value your small business: a guide

There are two things every good business owner should know: the price of everything and the value of their time. But when you’re busy sowing the seeds of hard work, how can you assess the value of the fruits of your labour?

A good place to start is valuing your business.

Not only can this provide a clearer picture of your business’s financial health, it can also give a useful steer on whether you should keep calm and carry on or change tact to make the most of your business’s potential and increase those all-important profit margins.

So, whether you’re thinking of selling up and moving on to pastures new or looking to secure funding to help your business grow, here’s AXA’s step-by-step guide on how to value your small business.

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Why value a business?

Carrying out a valuation of your business is a great way to examine the financial health and moneymaking potential of your business. As well as this, there are plenty of other benefits that come part and parcel with valuing your business:

  1. It helps put a concrete price tag on your business, which is useful if you’re selling your business or succession planning.
  2. If you’re looking to secure additional funding for your business, it can provide investors with a realistic estimate of the value of your business.
  3. It can give you a clearer overview of the financial health of your business, which can help you to pinpoint underperforming areas and focus on the approaches that are working well.
  4. If your staff want to buy or sell shares in your business, valuing your business can help you set a fair price.

Valuing your business isn’t just about offering a snapshot of the profit and loss of your business, it can give a detailed overview of your company’s chances of sustainability over a prolonged period of time, so it’s definitely something that you should consider.

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What affects the value of a business?

There are loads of factors that can impact the value of your business, including the situation leading to the valuation – for example, a voluntary sale versus a forced one – the age of your business, and the current and future profitability of your business assets. Below are some key areas to take into consideration before you start tallying up the total value of your business.

People

If you or your management team have a strong record of steering the business in a successful direction, then this this can have a positive impact on your business’ value. And if you have a band of loyal, experienced staff who are likely to stick with your business through thick and thin, this can cause your business’ value to rise too. It’s also a good idea to consider how much the success and longevity of your business depends on your skillset. If you think your business would sink without your captainship, this can prove risky and cause your business value to slump.

Financial record

If you’re hoping for a favourable business valuation it’s important that your business’s finances add up as they should. Detailed records showing how you’ve business managed costs, well-evidenced past, present and future cashflow and profit projections, and the level of debt you’re currently in can all have an impact on your business valuation.

Intangible assets

Your business’ intangible assets play an important role in its overall value. From your company’s growth potential and reputation, to trademarks, intellectual property and the strength and profitability of your company’s relationship with customers and clients, each has an accumulative impact on your business valuation.

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The market your business operates in

The general condition of the economy, including interest rate levels and the overall demand of your business’s services, can affect your business valuation. A saturated market, with many businesses like yours operating in the same space, can devalue your business, while a large number of people expressing interest in the sale of your business can push the price up.

Tangible assets

The physical assets that you’ve acquired to help with the day-to-day running of your business can also boost your business valuation. This includes assets such as your business premises, equipment – including computers and tools – stock, and the number of clients and customer you have.

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How do you value a business?

Now that you know what can cause the value of your business to rise and fall, it’s time to examine the steps you can take to get an accurate understanding of the value of your business.

There’s no one fixed way of working out the value of your business, it’s more a case of testing out which options sits best with you. But always remember: the true value of your business is how much someone is willing to pay for it.

1. Asset valuation

If your business has sizable assets, then an asset valuation could be an ideal way to get to grips with the overall value of your business.

There are two types of asset: tangible and intangible. Tangible assets are the physical things belonging to your business, such as your business premises, stock, land and equipment. Intangible assets are any non-physical assets, such as your business’ brand, reputation and intellectual property including copyrights and patents.

To get the Net Book Value (NBV) of your business, you subtract the costs of your business liabilities (such as debt and outstanding credit) from the total value of your tangible and intangible assets.

It’s a good idea to regularly update records of your assets so that their value takes inflation, depreciation and appreciation into consideration, to help keep your asset valuations accurate.

Often, this asset valuation method yields the lowest value for a business because it doesn’t take into account any ‘goodwill’ towards the business – a technical accountancy term that covers the difference between a company’s market value (what people are willing to pay for it) and the value of its net assets (assets minus liabilities).

2. Industry best-practice

Not all industries are created equal. And for some, the buying and selling of businesses may be more common than in others.

The industries where the selling of businesses take place frequently – such as retail, where business turnover, customer volume and outlets are key indicators of value – might have specific rules of thumb that you can use as a guide to lead you through your business valuation process.

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3. Entry valuation

An entry valuation framework model values a business by working out how much it would cost to establish a similar business. Essentially it’s asking ‘if my business didn’t exist, how much money would it cost to start it from scratch, right now?’

A good way to get an accurate estimate is to create a list detailing start-up costs, the price of acquiring tangible assets, employing and training staff, establishing a customer base, and developing products and services.

Once you have this costs list in place, consider how you could be as thrifty as possible when setting up. For example, you might be able to save some of your hard-earned cash if you set up your business in a cheaper location or opt for more cost-effective equipment.

After working out these savings, subtract them from your projected start-up costs. Ta-da, you’ve worked out the value of your business based on your entry valuation cost!

4. Discounted cash flow

The discounted cash flow method is one of the trickiest ways of valuing a business.

This is an income-based approach to business valuation that’s focused on working out what a future stream of cash flow is worth today. It tends to be used by established businesses who project stable, predictable cash flows for the years ahead.

To work out the present value of future cash flow, you apply a discount interest rate, usually between 15% to 25%, to cover any risk (such as unexpected costs or bills) and the time value of money. The time value of money is the idea that £1 earned today will be worth more than £1 gained tomorrow due to its earning potential.

To reach an estimated business valuation, you add the projected takings forecast for the next 15 years or so, plus a residual value at the end of the period. If your estimated business valuation is higher than today’s investment, then it’s likely that this is a business investment worth keeping in your sights.

5. Comparable analysis

An easy but popular approach to valuing your business, the comparable analysis method involves assessing the value of businesses similar to yours that have recently been sold or whose business valuation is currently common knowledge in the public domain.

Comparable analysis gives an observable value for your own business, based on what rival or similar companies are worth at present.

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How can I secure a good business valuation?

Valuing a business is as much an artform as it is a science. Thankfully, there are plenty of easy steps you can take to help secure the best business valuation possible.

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Have a solid business plan

This might sound obvious but having a business plan in place which clearly outlines how you’re going to meet short-term and long-terms – and by extension, bring in those all-important profits – is a simple but effective way to show investors and buyers that your company’s potential is in good hands.

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Get your finances in order

The last thing you want is a poor record of your business’ cash flow putting off potential buyers or preventing you from getting an accurate business valuation.

Before you start the process of valuing your small business, it’s a good idea to get your finances in tip-top condition to ensure you’ve got firm financial foundations. Keeping the following documents, in a safe, easy-to-reach place could help make the process of valuing your business that bit easier:

  • Profit and loss statements (at least three years’ worth)
  • Tax filings and returns
  • Records of purchases
  • Licenses, deeds and premises documents
  • A regularly updated overview of your business’ finances
  • Credit reports
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Keep risk to a minimum

As well as investing in business insurance to protect against accidents that could bring your business to an unexpected standstill, there are some simple steps you can take to minimise risk.

For example, it’s a good idea not to solely rely on working regularly with the same clients and customers, as a change in circumstances could bring this working relationship – and the associated income stream to your business – to a sudden end. Instead, having a wide-spanning network of customers and clients can help to minimise risks like this.

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Don’t overestimate your business’ value

You’ve worked hard to get your business into the shape it’s in today. However, it’s important that you don’t let your pride in your company cloud your judgement and cause you to overestimate your value – especially as steep asking prices can put off potential buyers and investors.

Keep a sensible head when valuing your business so that you reach a price that’s not only reflective of the hard work you’ve put in, but one that’s accurate and enticing to investors or buyers.

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Flex your negotiation skills

Not everything of value can be measured. But when it comes to the value of your small business’ intangible assets, it’s your responsibility to promote their worth to capture the attention of buyers.

For example, if you have a good relationship with customers and suppliers, or have loyal employees, it’s important that you factor these assets into your valuation if you’re selling it on or using it to secure further investment.

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Get professional advice

Working out the value of your small business can feel like a huge task. If you’re struggling or finding the whole process overly complicated, it could be a good idea to get in touch with an accountant that specialises in valuation to lend a helping hand rather than working to make things add up on your own.

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Know your worth

We know you’ve put bucketloads of hard work, grit and determination into making your business what it is today. But although there’s not just one sure-fire way to get an accurate understanding of the value of your business, it’s important to know your worth while leaving emotions out of the equation.

You want things to add up on their own merits, and remaining impartial could help prevent you from over or underestimating your business’ worth. Remember, if you’re unsure of how to go about valuing your business, the best step you can take is to reach out for professional help.

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Protect what you value most with AXA Business Insurance

Habits become values. And as a business owner you’re well-versed in putting the hard work in to make your business a success. Rest easy with our insurance, knowing you’re protecting what’s most precious to you – through the good and the bad.