What is my business worth?
Although you may want to value your business to help with a decision on selling up or retiring, you may also need to know its value to give to potential investors, to motivate management or to set a price when employees are buying or selling shares in your company.
What factors may affect the value of your business?
Aside from the tangible assets such as machinery, land and buildings there are many intangible assets that are harder to value. These may include trademarks, customer lists, reputation and the strength of the workforce. You also need to take into account the kind of product you have, the circumstances (e.g. a forced sale or a voluntary one) and the age of the business (e.g. an established company versus one with potential).#
If your business is well established with good profitability, the Earnings Multiples formula may be a suitable method to value it. This involves working out the normalised annual profit and multiplying it by the standard earnings multiple for your particular industry to arrive at the price-earnings ratio of the business.
Industry specific methods
Some industries may have their own particular standard when valuing businesses. These can include number of customers, number of outlets or turnover.
The cost of entry
To work out the cost of starting up a similar business you would need to consider all the costs that were involved in getting the business to its current position. This could include developing products & services, employing & training staff and building a client base.
Discounted cash flow
This method of valuation involves estimating future cash flows and then applying a discount rate to work out the value of the cash flows today. Due to the fact that reliable estimates are needed of future cash flows, this method is only really suitable to mature businesses.
What about tax when I sell my business?
Capital Gains Tax will be due on the profits realised from selling your business (10% on gains up to the higher rate tax threshold and 20% above the threshold) although the amount payable can be reduced by claiming a relief. Entrepreneur’s Relief can reduce the capital gains tax payable to 10% providing certain conditions are met. By re-investing the gains from a business sale in new business assets, Rollover Relief allows any CGT liabilities to be deferred until the new assets are sold. Holdover Relief may also apply if you are giving away rather than selling your business.
Every business valuation should take into account all of the above factors along with the buyer and seller’s particular circumstances to arrive at a sensible value that someone is willing to pay for it.