There are some things you simply can’t put a price on, but by learning how to value your business, you should know exactly what your company is worth to the wider world. There are lots of business valuation methods, and there’s a lot more to it than a ‘finger in the air’ approach, so in this guide we’ll explore the different formulas for valuing a company.
Why would you need to value a business?
Knowing how much your company is worth isn’t just about marvelling at your long-term growth and genius cash flow management. There are good reasons as to why you may want to value your business, such as:
- Selling a company. If you’re looking for someone else to take over the reins, you may want to make sure you get a fair market price when you sell.
- Getting investment. When attracting investors, they’ll decide whether to back your business based on a credible valuation.
- Selling shares. Valuing your business means you may be able to sell shares in your company at a fair price, either to your employees or investors.
- Succession planning. Getting a valuation is vital if you’re thinking about leaving the business to someone else, as you’ll need to share an accurate price tag based on everything from expected cash flows to tax liabilities.
- Tracking your performance. By valuing your company, you may be able to more accurately compare how your business is performing over time and make any adjustments to areas that need improvement.
How to value your business
Once you’re sold on the wisdom of valuing your company, here are some of the business valuation formulas you could try.
- Asset-based valuation . If your business has lots of tangible assets, such as a premises, equipment and vehicles, you may wish to get an asset-based valuation of your company. Using this approach, you (or whoever carries out the valuation) could calculate the Net Book Value, sometimes referred to as Net Asset Value , by subtracting your total liabilities (such as debt) from the value of your assets. You will need to take into account any depreciation in your assets’ value (such as old stock) and as we’ll cover later, remember that intangible assets should form part of your valuation too.
- P/E ratio method . A P/E ratio stands for price to earnings ratio, which is a common way to value a business based on profit. The formula is simply to multiply your company’s pre-tax profits by a chosen ratio – say, four. So if your company made pre-tax profits of £100,000, you would multiply by four, valuing your business at £400,000. However, deciding what ratio to use is easier said than done. A high-growth start-up may have a higher P/E ratio since they’re scaling up quickly, whereas an established business with more dependable profits may base their valuation on a lower ratio.
- Predicted cash flow. A predicted cash flow method is where you calculate the present day value of a business based on future revenue. The short explanation is that you add-up your projected earnings over a long-term future period, then deduct around 15 to 25% (based on factors like time and risk) to work out the present value of your future earnings. This business valuation technique is potentially useful for companies that can reliably predict their future revenues.
- Entry cost valuation. This business valuation formula is where you work out how much it would cost to set up a company similar to your own from scratch. You can estimate these entry costs by making a list of typical start-up expenditure in your industry, from hiring staff to setting up a payroll, as well as any savings you could theoretically make.
- Comparing the market. If similar companies to yours have been sold, doing your homework and finding out the sale price (if disclosed) could help inform your business valuation. You can search the Companies House register for publicly available information about limited companies in the UK.
Remember your intangible assets
It’s one thing to come up with a valuation of your tangible assets, from bricks and mortar to office equipment, but your intangible assets also form part of your company’s value. Examples include:
- Your reputation
- Brand loyalty
- Your staff and their talent
- Relationships (for example, clients and suppliers)
- Intellectual property (such as trademarks)
When you crunch the numbers and value your company, these intangibles could complement some of the aforementioned techniques for valuing a business.
More from Tyl
Valuing your business is no walk in the park, but we hope our guide has shed some light on different ways to do your sums without an abacus in sight. If you’re looking for more help and guidance on running your business, check out the treasure trove of articles over at Tyl Talks.
This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.
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