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Are you considering selling your business? Or perhaps you’re simply keen to keep track of the value of what you’re building to perhaps one day be ready to sell. Either way, putting a price on a business can be tricky. What the seller wants for their business versus what the buyer wants to pay can sometimes be two very different figures.And, it doesn’t help that there is no one set valuation method, which means you may even end up using a combination of methods to arrive at the final figure.
They say the true value of your business is only what someone is willing to pay for it… but before the point of payment, the buyer would of course perform some form of valuation, even if it’s just so they can have some assurance they aren’t paying too much. Generally, valuers are guided by common market practices and the valuation methodologies provided in the ASIC Regulatory Guide 111.
There are a number of valuation methods that can be used, each very different in their approach depending on the kind of business and at what stage the business is at, but for the purposes of this article, we’ll take a look at two of the more common methods you might use.
It’s important to state at this point, that you won’t finish reading this article and be armed with all the info you need, but it’s a great start to get you prepared for the time you speak seriously with a professional about a sale.
In this approach, you would sell the assets of your business.
Buying the assets and valuing only the assets can often be the easiest method, particularly if the business is a stable, asset-rich business with easy to value machinery, property, or plant equipment. Harder assets to value include those of the intangible kind – good will, a well-respected brand, market share or potential for growth. So, if the business is full of intangible assets with significant value, this method may not be best.
How’s it done?
In layman’s terms, you simply add up the assets of the business and subtract the liabilities. If a business has $800,000 in plant and equipment, and owes $100,000 in outstanding invoices, the asset value of the business is $700,000. This is the starting point, and then you need to update the value of the assets and liabilities to reflect the current market value, such as:
At this point, you’ll have a good snapshot and decent guide of what your business is worth. From here, we suggest packaging up your findings and speaking with one of our team about refining the sums and developing a more concrete valuation.
This valuation method is centred around the notion of the entity’s maintainable earnings. Will the buyer be comfortable that these earnings will continue once they take over the business and you depart?
This method works well for mature businesses with a relatively stable profit but can be tailored to suit any business of any size – often Saas businesses or those with recurring revenue can perform well here provided there is a profit to analyse!
The FME are calculated based on the historical profits of the business plus, usually, a forecast of the next year. The profits of the entity are adjusted for any non-business or extraordinary expenses. Other costs may even be included such a commercial wage of the business director, particularly if they have only been paid dividends or via a trust distribution.
Once the FME has been calculated, the business value is worked out by capitalising this amount by an appropriate multiple. The multiple is generally set by market standards and is reflective of the inherent risk the business may have. For example, a business that is considered high-risk may attract a multiple of 2 (a capitalisation rate of 50%). A low-risk business may attract a multiple of 5 (a capitalisation rate of 20%) or as high as 20 depending on the business model and outcome of the FME calcs.
Fair warning – there can be quite a bit involved under an Income-Based valuation approach, especially when it comes to complex forecasting and number crunching. Again, this is where we’d suggest it’s time to speak with the Attune team to create a more robust and reliable set of numbers that show just how good your business is and can be into the future.
We may share some further valuation tips or methods in future articles, but hopefully what you’ve read here gives you a starting point for valuing your own business. If you’re considering selling, buying or just want to know where you stand, speak with the Attune team for sound, strategic advice for your business: 1300 866 113.
