Three ways to value your business pre-sale

A vital element of selling your business will be determining a valuation, which you can then use to guide your sale price. Due to the valuation’s central role in your sales process, it’s something you will need to be certain you get right.

Undervalue your business and you run the risk of attracting a fee that doesn’t reflect your company’s true worth. Overvalue and you may find that potential buyers are unwilling to meet your demands and your sale may flounder.

There are several ways for you to generate a balanced valuation of your business and, often, using more than one can ensure an especially accurate figure. A key step to take before beginning the valuation process, however, will be to engage the services of a valuations expert or appraiser, who can help you decide on the best method of valuation.

Asset-based valuation
If your business is asset-heavy then an asset-based approach may be the most suitable way to value your business. Start with an accurate overview of all the assets your business owns and then seek a valuation of their worth.

A valuation of the worth of your assets will take in a broad range of factors, relating to both your specific industry and to the wider economy. This valuation will also take into account whether assets have depreciated or gained in value, with assets like equipment likely to have depreciated, while assets like property may have gained in value.

Once you have an accurate valuation of all your assets, then all you need to do is deduct your company’s liabilities and you will have an asset-based valuation of your business.

P/E ratio valuation
The use of a business’ price-to-earnings (P/E) ratio is a very common method of valuation among companies with high forecast profit and/or a solid history of repeat earnings.

The valuation is formed by multiplying the business’ post-tax profits by its P/E ratio. So, if a company has post-tax profits of £250,000 and a P/E ratio of two then the P/E ratio valuation would be £500,000.

Entry cost valuation
Finally, an entry cost valuation simply revolves around how much it would cost for you to set up and build a business similar to your current one. In order to calculate this, you will need to factor in what you’ve spent so far on your business, from start-up capital to the cost of acquiring assets to recruitment, training and marketing costs.

Once you’ve got this figure, subtract savings such as how you could improve your business efficiency, such as through better technology, or how you could cut costs by, for example, moving to a cheaper office, and you will have your entry cost valuation.

Remember, using more than one of these methods can help fine-tune your valuation. Your valuation or appraisal expert will be able to guide you in determining which method or methods are most appropriate.

It’s also important to remember that these are merely guidelines and other, less tangible, factors such as your social media presence, your employee skillset, customer base and growth potential should also be factored in as distinguishing features.