Selling up: Methods of valuing your business

Just like when you sell your home, the sale of your business will require you to obtain an accurate valuation of your company. If you want a quick sale it can be tempting to undervalue your business, but it's also very easy to overstate its value if you're just taking a guess.

There are a number of methods you can consider to help you find the right balance, and it's never a bad idea to consider addressing more than one to make sure you've really looked at your business from every angle.

Price to earnings valuations

Many businesses are valued using their price to earnings ratio (P/E), which will differ depending on the type of business you're running. If you're running a company with high forecast profit growth your P/E ration will be higher, and it will also be higher if you have a good record of repeat earnings.

While the P/E ratio you use will depend on your individual business, most smaller companies have a ratio of four to 10, so if you make £200,000 post-tax profits your business will be valued at £800,000.

Asset-based valuations

If you're running a stable business with a high number of tangible assets you may be best suited to valuing your company using the asset-based method. Begin by making accurate accounts of all the assets you own and then consider how much each of those assets is worth, taking into account economics and industry developments.

For example, if you have old stock it may no longer be worth as much as it was, but your commercial property may have risen in value.

Entry cost valuations

Put simply - how much would it cost for you to set up your business from scratch? This method requires you to take into account everything you have spent money on since you started your business, from tangible assets and start up costs to all the recruitment, marketing and training you've invested in.

Don't forget to consider any savings you could make if you set up now with cheaper materials, for example, or if you set up your company using a more modern approach. Once you've established this figure, you've got an entry cost valuation.

Getting help

Valuations experts or appraisers specialise in help you value your business using the best methods available. If you're not sure your valuation will be accurate, or you need help deciding which valuation will best represent your business, an appraiser could be the ideal addition to your sales team.

When engaging the services of an appraiser, try to find a local expert with a knowledge of both the local and national market. Those who are more familiar with your specific industry are also more likely to have in-depth knowledge of your target market, and may even have contacts who can help you find a buyer without having to market at all.

Don't forget...

Before committing to your valuation, don't forget to take into account the features of your company that set it apart from similar businesses. Any distinguishing features could increase your value, including:

  • Employees with specialist skills or experience

  • A thriving customer base or strong reputation

  • A strong social media following

  • Steady annual earnings

  • Room to grow and expand