Pricing and valuing your business

You need to value your business to make it easier for investors to judge whether they want to invest in your company or not. This guide will give you a better understanding of how to put a value to your business. By the end of this guide you should know:

  • Why you need to value your business
  • Factors affecting your valuation
  • How to value your business

Why you need to value your business

Investors want to know the rate of return they are going to get for their investment. They want to know how much they are going to get back for their risk. It is an important part of their deliberations on whether to invest or not. Coming to a value is a complex business and whatever value you emerge with it will be a subjective one. Business owners often put the value of their company higher than it actually is. You have to come to as realistic value as you possibly can because if an investor thinks you have over-valued then they are unlikely to proceed with any investment.

  • Understand the need to come to a realistic level of the value in your business

Factors affecting your valuation

Past, present and projected financial forecasts, especially profits and cashflow are important to the value of your business. Your ability to control costs should also be considered as should present economic conditions especially what is happening in your business sector. The values of your competitors also affects your own value. Your assets including property, equipment and stock-in-hand will affect your value. Your liabilities such as your debt is also considered. Goodwill is a premium over your net-asset valuation. It is an abstract value which includes the reputation of your brands and the strength of your customer relationships. The track record of your management team and the experience and commitment of your staff are other factors.

  • Assess the variety of factors which will affect your valuation

How to value your business

There are a range of methods you could use. If your business has a record of bringing in sustainable profits then it can be valued at a multiple of your earnings. An estimate of your earnings can be reached by adjusting your profits for any unusual one-off items. Lower multiples will be used for smaller businesses than for larger companies in the same sector. Established businesses can find their value in a similar way but using future cashflow projections. If you have strong intangible assets, especially useful in the property or construction sector, then these can also be used as a method of valuation. Take note that an investor may choose to use more than just the one method to come to a valuation.

  • Find the most suitable method of valuation

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