For many business owners considering an exit, one question stands above all others:
“What is my business worth?”
It’s an understandable question, but unfortunately there isn’t a simple answer.
Some owners assume their business is worth a multiple of turnover. Others focus on the value of the assets held within the business. Whilst these factors form part of the overall picture, buyers are usually more interested in the business’s future earning potential and the level of risk associated with achieving it.
What do buyers look for?
Buyers don’t simply assess the accounts – they assess the whole business.
Two businesses with similar turnover and profits can achieve very different sale prices because buyers look well beyond the financial statements.
They will often consider questions such as:
- Is the business heavily dependent on the owner?
- Is there an experienced management team in place?
- Are customers well diversified?
- Does the business generate recurring or predictable income?
- Are there clear opportunities for future growth?
- How competitive is the market?
- What risks could a new owner inherit?
These factors all influence how attractive a business is to a prospective purchaser and, ultimately, what they may be prepared to pay.
How is a business valued?
For most established owner-managed businesses, the starting point is the profits the business is capable of generating on a sustainable basis.
Historic accounts provide an important insight, but buyers will often adjust the figures to reflect the underlying trading performance of the business.
Typical adjustments may include:
- Director remuneration that differs from market rates.
- Personal expenditure included within the accounts.
- One-off or exceptional costs.
- Non-trading income or expenses.
Once a maintainable level of profit has been established, buyers will normally apply a valuation multiple.
The appropriate multiple will depend on a range of factors, including the size of the business, the sector, management structure, growth potential, market conditions and the perceived level of risk.
Can I increase the value of my business?
In many cases, yes.
Businesses that demonstrate sustainable profitability, strong systems and processes, diversified customers and reduced reliance on the owner are often viewed more favourably by buyers.
Even relatively small improvements made before a business is brought to market can increase buyer confidence and improve both saleability and value.
Planning ahead is often just as important as understanding today’s value.
Every business is different
There is no universal formula for valuing a business.
Online calculators and headline valuation multiples can provide a broad indication, but they rarely take account of the individual characteristics that make one business more attractive than another.
Every business has its own strengths, challenges and opportunities. Understanding those factors can help you make better decisions, whether you’re planning to sell next year or simply looking ahead.
Thinking about selling?
Every business is different.
Whether you’re planning to sell next year or simply looking ahead, understanding how buyers are likely to view your business is one of the most valuable steps you can take.
Our business valuation & exit review provides an independent assessment of your business, together with practical recommendations to help you understand its potential value and identify opportunities to maximise it before an eventual sale.
We advise owners of established businesses across Oxfordshire, Buckinghamshire and the Thames Valley, including Aylesbury, Oxford, Slough, Marlow, Reading, Banbury and Windsor, together with the surrounding areas.
Find out more about our business valuation & exit review, or contact us for a confidential, no-obligation discussion about your plans.