How to value your business.

I have a conversation nearly every week with the owners of small and medium-sized companies about how much their company is worth. The truth is that it is only worth what someone else is willing to pay for it. However, to get a sense of what the analysts and accountants use to value businesses it is worth knowing the commonly used methods:

• • Price Earnings Ratio – this is commonly used if the company is established and has been making reasonable levels of profits. Sometimes a multiple of EBITDA is used for industries that are not capital intensive.
  • Discounted Cash Flow – this is often used when the company has invested heavily in the past and is expecting some growth in the future.
  • Multiple of revenue – used by some industries that are fairly predictable in their cost base and structure. Ie supermarkets, accountancy firms etc.
  • Entry cost – Used to establish the cost it would take another company to start the business.
  • Entry cost plus opportunity lost – the same as above plus the potential opportunity lost given the time it would take to start from scratch.
  • Value of net assets – Often used when the company has substantial tangible assets such as property.
  • Industry “rule of thumb” – some industry sectors have recognisable valuation methods.
  • Comparables – looking at similar sized transactions within the same sector.

Should you be considering the sale of your company over the next few years then it is worthwhile planning towards this early on. Please contact [email protected].