How to Get Your Business Valued
According to a recent report as many as 98% of business owners don’t know an accurate, real-time valuation of their own business.
That sounds like a lot. But when you consider that many business owners, especially those of SMEs and start-ups, are fully invested in the day-to-day operations, sales, marketing, account management, strategic thinking and more, the chances of them being able to also value their business accurately and consistently in an evolving economy and market is quite a challenge.
Shrewd, learned, and ultimately, successful business owners know how to prioritise and manage their time efficiently. Focusing on what’s integral to sustained prosperity. This doesn’t generally include having an accurate month-to-month valuation of their enterprise. Why? Many business owners have more pressing priorities, such as expanding market share, servicing customers, and maintaining a healthy financial outlook.
However, this doesn’t mean that there isn’t merit in knowing the value of your enterprise.
For any business owners in various circumstances who have ever pondered how much is my business worth, you’re in luck. Here is all the information you’ll need to make an accurate valuation.
- The basics of business valuation: Understand what business valuation entails and why it is essential for business owners. Learn what determines the valuation of a business.
- Key factors influencing business value: Learn about the elements that can impact your business’s value, from financial records to market conditions.
- Importance of accurate financial records: Discover why keeping detailed and accurate financial records is critical for a precise valuation.
- The role of market conditions and assets: Explore how economic conditions and both tangible and intangible assets affect your business’s value.
- Different valuation methods and their applications: Gain insights into various valuation methods, such as price-to-earnings ratio and asset valuation, and when to use them. Understand how to calculate the value of your business in the UK.
- How professional valuation services can help: Find out how professional valuers can provide tailored advice to help you understand and maximise your business’s worth. Discover why an accurate business valuation is important.
Let’s delve into the essential aspects of valuing your business and why it’s important to have an accurate understanding of your enterprise’s worth.
What Is Business Valuation?
A business valuation, also known as a company valuation, is best defined as the process of determining the market value or capitalisation of a humble or expansive business enterprise.
Valuations are prepared by chartered accountants, leading professional services businesses, like PwC, and specialist commercial valuers and will be conducted by skilled analysts, examining individual areas of the business to determine the fiscal value of each as a unit, and the business as a whole.
There is an array of contributing factors that contribute to accurately valuing a business. Each provides valuable insight, allowing business owners to understand performance, assets, make informed financial decisions, future-poof operations, and more.Are you a business owner pondering how do I calculate the value of my business UK? Ward Goodman has compiled the essential information you need to know to accurately value your business, starting with what influences a business’s value.
What determines the valuation of a business?
Business owners don’t need to put each area under a microscope, reviewing iteration after iteration of data, to obtain an accurate valuation. However, having a solid understanding of the valuation variables will, undoubtedly, help them when seeking the assistance of professional valuers to understand how do I calculate the value of my UK-based business.
Below we’ve listed some of the factors that influence business value.
Financial Records
Accurate and up-to-date financial records, including cash flow, profit and loss statements, assets and liabilities, and stakeholders’ equity, are all integral to accurately valuing a business. ,
Be sure to present detailed accounting that promotes financial stability and sound budget management to valuers. These are key fiscal health markers, and, in a broader sense, indicate sound short and long-term decision-making and are prime indicators of future stability and success, whilst exposing any liabilities such as outstanding debt.
Business Market
In a buoyant economic climate, one with manageable interest rates and increased consumer spending power, businesses have a greater opportunity to thrive. And the more successful they are, the more valuable they will become. Conversely, a deflated economic climate or a saturated market can devalue your business.
There are also further market circumstances that affect the value of your business. For instance, if you’re selling your business and have two or more buyers competing to purchase it, this can drive up its market value.
Tangible Assets
Some businesses require a lot of tangible assets to operate successfully. For example, a logistics business will likely have a large fleet of vehicles to transport goods across the county. A solely remote digital marketing agency, one without a fixed office, may only need a handful of laptops and basic office equipment. Examples of tangible assets include:
- Cash
- Inventory
- Business premises
- Land
- Machinery
The more assets your business has, the greater its market value will be.
Intangible Assets
However, there are other types of businesses that don’t require physical assets to operate and prosper. They can be created or acquired. For instance, a patent for a revolutionary product or a brand name that inspires immediate recognition, even a legal agreement or contract. Examples of intangible assets include:
- Intellectual property
- Licences
- Trade secrets
- Reputation
- Brand recognition
Your People
A strong business is one that is able to attract, cultivate, and retain the best people. A management team with a strong vision and forward-thinking ethos or in-depth understanding of their market. One that’s decisive. Proactive. Transparent. Leads by example and inspires everyone around them. Their strength and attitude will then filter down throughout the business.
This commitment can be infectious. Employees will recognise the vision. The opportunity, and this is often rewarded by loyalty and commitment. This creates a strong infrastructure. A compelling reason to attract, retain and develop thought-leaders. Experts. Those best qualified for their individual roles, and when you have the best people in each role, you have a recipe for sustained success.
More than that, a business elevated by a strong workforce will bolster its commercial value.
Why is an accurate business valuation important?
An accurate valuation provides businesses with a pragmatic and transparent understanding of their business’s health and prosperity.
Whether you’re looking to obtain financial investment to fuel growth or believe the time is right to sell assets or the business itself, knowing how much your business is worth will allow you to make better short and long-term strategic decisions.
In fact, an accurate valuation illuminates strengths and weaknesses, highlighting areas of both improvement and strengths that can be leveraged to further bolster your financial health or put a spotlight on areas primed for investment.
Think of it as an MOT for your business. One that provides ample insight into its fiscal vitality and endurance potential in the months and years to come.
How do I calculate the value of my business in the UK?
The question of how do I calculate the value of my UK business isn’t a straightforward one. There are many internal and external factors to consider. Astute organisations opt to incorporate a combination of different methods to ascertain a true reflection of its value.
To learn more about the methods and circumstances used to value a business, keep reading below.
Your Industry
Some sectors are renowned for having start-up businesses primed for buyouts by larger competitors. Online and social media companies, for example. Buyouts and takeovers happen so frequently, that it’s not hyperbole to assume that entrepreneurs innovate and commercial ideas in the hope that they’ll sell the enterprise in less than five years. Then the cycle is repeated.
In this case, value is determined by potential adoption and reach. But this is certainly not the norm. For example, a retail business is valued on factors like turnover, customer base, and number of outlets. Bottom line? Always be cognisant of the industry.
Entry Validation
The entry validation framework valuation model determines the value of a business by calculating the cost of starting a similar venture from scratch. Let’s say that you own a handful of regional Japanese restaurants, and you want to expand your UK market share by expanding into the neighbouring county. The entry validation model is an excellent way of calculating the financial cost of the expansion, focusing on how to ensure the venture is as financially viable as possible.
How would you do this? Firstly, you’d start by calculating the costs of opening the new restaurant, including commercial building rental costs, restaurant fit-out, and acquisition of tangible costs, such as tables, chairs, kitchen utensils, cutlery, etc.
Once you’ve calculated the start-up costs, you’d then have to consider how to reduce costs to maximise profit potential. You might want to carefully consider the restaurant’s location. You’d need somewhere with notable footfall and affordable rental costs. Maybe carefully consider how many members of staff you’ll need. Research vendors that offer top-quality recipe ingredients that aren’t overall priced, etcetera.
The entry validation cost is the projected startup cost minus potential savings, and it can make the difference between profitability and breaking even or loss when a new business is in its infancy. This valuation method is especially useful to new or niche startups.
Price to Earnings Ratio
When blue-chip or large SME business owners meditate on the question how do I calculate the value of my UK business, there is one valuation model that’s generally considered more favourable, price to earnings ratio.
Why? The P/E ratio evaluates average share prices and company earnings over the preceding 12-months compared to similar businesses to help ascertain high, average or poor performance. This helps to determine how much profit a potential investor can anticipate from their investment.
Most businesses have a predetermined P/E ratio somewhere between four and ten. Buoyant businesses with high forecast growth have higher P/E ratio and are typically found in sectors like IT and tech innovation.
Calculating your business’s worth using a P/E ratio is quite straightforward. For instance, if your net profits were £200,000 and comparable companies had a P/E ration of five, you’d multiply £200,000 by five and determine that your company’s valuation would be £1,000,000.
Be sure to remember that businesses have both tangible assets and intangible assets. Tangible assets are easy to identify. Intangible assets, i.e., your reputation, not so much. Privately held companies may also want to explore other measurement ratios, such as the revenue to cost ratio to get a more accurate valuation.
The Times Revenue Method
The Times Revenue Method is commonly used to value newly established or companies in their infancy who don’t have a sufficient earnings history to utilise other valuation models by calculating a typical business revenue over a year and multiplying that by an industry-specific multiplier.
This multiplier typically ranges from 0.5 to 2.0, depending on the industry’s potential reach and growth rate. Obviously, sectors expected to grow rapidly, such as cyber security, educational technology and green manufacturing have higher multiplier values, whereas sectors with lower anticipated growth rates, including property and infrastructure will have lower multiplier values.
One caveat to the Time Revenue method is that it, generally speaking, isn’t considered to be massively reliable. Revenue doesn’t automatically translate to profit and the Times Revenue method doesn’t generally factor a company’s expenses and potential of generating a positive net income.
Asset Valuation
Some businesses have more tangible and intangible assets than others. For instance, a global brand, like Nike, Coca Cola, and Apple have significant fiscal value in their name alone.
Engineering businesses which, for instance, sell industrial equipment, like centrifuges or containers are more likely to be asset rich. A personal training or life coaching enterprise only needs one person. Probably a computer. Engineering retailers will have a broad range of tangible assets. Personal trainers may just have one solid intangible asset, themselves.
The value of an asset as reported in a company’s books is called the Net Book Value (NBV). To calculate the Net Book Value (NBV) of your business, you’ll need to subtract the total value of your tangible and intangible assets from all business liabilities, including credit and any outstanding debt.
Shrewd business owners, especially those who have to manage substantial assets from varying sources, seek sound financial advice from leading financial authorities to help them to accurately value their business. However, asset valuation may not be the best methodology for business owners with a wealth of intangible assets and want to know how do I calculate the value of my business UK.
Comparable Analysis
The last way to accurately calculate the value of a business is to utilise the comparative analysis approach by estimating its value by comparing it to similar businesses in your industry. Comparable analysis provides an observable business value based on the current market value of similar businesses.
Comparable analysis valuations involve leveraging different valuation models, such as price to earnings ratio or enterprise value or EBITDA (the methods banks use to ascertain if your business is able to pay off its liabilities) and serve as a benchmark to determine your business value.
Public companies often have higher valuations than private companies because of the marketability and liquidity. Therefore, business owners who have used comparable data from publicly traded companies when determining their own business valuation may need to discount their own business valuation by as much as 30-50%.
If you’re in any doubt about whether comparable analysis is the right valuation approach for your business, don’t hesitate to consult a financial advisor.
How Do I Calculate the Value of My UK Business?
It’s a question that many business owners have asked. The answer is simple: seek out professional advice from reputable professional valuers, like Ward Goodman to receive a bespoke valuation tailored to your individual circumstances.
Our expert team delivers a five-star business valuation service. Whether you’re looking to buy or sell a business, resolve disputes amongst partners, raise equity, motivate management through value movement, and more, Ward Goodman will employ a tailored methodology to accurately determine how much your business is worth so that you can make informed commercial decisions.
Get in touch with Ward Goodman today and start the valuation process.