Valuing a Business

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Valuing, marketing and selling businesses is a big and sophisticated area of commercial activity, with many specialist companies actively engaged in using a great variety of approaches and methods to get answers to the question of: 'how much is this business worth'?  Reflecting on the value of your business regularly should be part of your overall review of performance andbusiness planning activity. Two common prompts for the owner of a business to seek a valuation are, ''how much is my business worth?' and 'how can I make it more valuable?'.

The importance of valuing your business is not something to be considered only if you want to sell it, although in simple terms the value of a business can be defined as what you can sell it for or what a purchaser is prepared to pay for it. Being concerned to regularly value your business may be significant in motivating you either because you can prove growth and success, or because you need a wake-up to make changes to yourbusiness plan.

When it comes to selling a business, responsible and reputable valuations can do much to ease the sellers fear of under-pricing his property and the purchasers fear of paying too much! Any valuation of a business cannot be absolutely accurate and reliable - there are too many variable factors in play, for example the nature and significance of intangible assets within the business and the ever-changing nature of the market in which it operates. Even with complex accounting formulae and methods, subjective judgments  will be made. Rather like buying and selling a house, different agencies will value the property differently. As sellers or purchasers, the best we can hope for are valuations that have some measure of agreement that we can be confident in, to give us something to work with.

There are at least three commonly recognised ways of valuing a business - which of these is used depends largely upon the type of business being valued:

  • Cash based methods assume that the value of the business value should be equal to the discounted value of future cash flows.
  • Market based methods are where we assume that the market is efficient, and we can use market information to value the business. The assumption is that the market values businesses consistently, so if necessary, the value of one company can be used to find the value of another.
  • Asset based methods - where the company assets form the basis for the valuation of the business. Asset based methods are difficult to apply to companies with high levels of intangible assets, and work best where plant, buildings or machinery are significant tangible assets.

In the end, the worth of a business hinges upon how much profit a purchaser can make from it, balanced by the risks involved. Past profitability and asset values are only the starting points. It is often intangible factors, such as key business relationships, which provide the most value and yet are the most difficult to value.