Carrying out a valuation of your business is a great way to examine its financial health and earning potential. It also helps put a concrete price tag on your company, which is useful for getting funding, growth planning, and if you ever want to (or have to) sell it.
This guide will show you how to put value on a small business. We’ll cover the following:
- What affects the value of a business
- What methods you can use to determine the value of your business
- How Countingup helps you stay organised and extract data you need for your valuation
What affects the value of a business?
There are many aspects that play into the value of your business such as:
- Tangible (physical) assets – items of value that you use to run your daily operations, including equipment and property.
- Intangible assets – non-physical items that play a key role in your business, like patents, copyrights, your brand name, and so on.
- Equity – the cash value of a valuable item you own after paying off any liabilities like tax or interest.
While tangible assets are rather easy to put a price tag on, intangible assets are more difficult to put a value on. Other aspects that affect your business value include:
- Your reputation
- Your clients’ or customers’ reputation
- The reason for the valuation (for example, a forced sale rather than a voluntary one)
- How old the business is
- The kind of product or service you sell
How do you put value on a small business?
There are a few methods used to determine a business’ value, as listed below:
- Price to earnings ratio (P/E)
A popular way to measure business value is by their price to earnings ratio (P/E), meaning how much profit it’s generating. This ratio works best for businesses with an established track record of profits.
You work out a P/E ratio based on the company’s profits. Generally, if a business is likely to experience a growth in profits, it might have a higher P/E ratio. A company might also have a higher P/E ratio if it has a good record of repeat earnings.
How you arrive at the appropriate number for your P/E ratio can vary significantly depending on your business. There isn’t a standard ratio you can use for every type of business. You might want to speak to an accountant or business adviser if you need to calculate your P/E ratio.
- Asset valuation
Your assets play an important role in determining your business value since they are key to your brand image and running your operations the way you do.
Start by working out the net book value (NBV) of your business, which are the assets recorded in your company account. How much are all your assets worth together?
You need to consider what the economic reality is when it comes to these assets. In other words, you value them based on the current market, not what you bought them for or how much you think they’re worth.
You also need to consider amortisation and depreciation, which refers to assets’ decrease in value over time. Learn more about what amortisation and depreciation are in this guide.
- Entry cost
For this method, you just ask, “how much would it cost to set up a similar business to the one being valued?”.
Factor in everything that got your business where it is today, including startup costs, assets, cost of sales (learn more here), and so on. Consider how much it would cost to develop any products, build a client base, and manage your internal processes.
Think about what saving you could have made when setting up and what you can do to save money in the future. Could you use cheaper materials or move to a cheaper location? If you identify any savings, subtract the amount from the total value.
Once you’ve taken everything into account, you have your entry cost – and valuation.
- Discounted cash flow
Discounted cash flow estimates what your future cash flow (money moving in and out of your business) would be worth today. You can calculate it by adding the dividends (profit shares) forecast for the next few years, plus an added value at the end of the period.
Basically, you calculate today’s value of future cash flows using a discounted rate (which can be anything from 15% to 25%) to account for the risk and time value of money. The time value of money refers to the idea that £1 today is worth more than £1 tomorrow.
- Industry best practices
Buying and selling of businesses is more common in some industries than in others. Retail is one of the industries where the selling of businesses takes place more frequently. In this sector, a business’s turnover, number of customers, and number of stores are key value indicators. On
Your industry might have specific rules and best practices when it comes to valuing a company that you can use to guide you through your business valuation process.
- Comparable analysis
Comparable analysis is our final example, which is an easy but popular approach to business valuation. This method involves assessing the value of a business similar to yours that has recently been sold or whose valuation is common knowledge in the public domain, meaning it’s accessible to anyone.
This form of analysis allows you to guess what your business might be worth based on what a competitor or other similar company is worth right now.
How do you get a good business valuation?
Here are a few things you can do to get a good business valuation:
- Plan ahead: write a solid business plan that focuses on how you’ll achieve both short-term and long-term results.
- Reduce risk: for example, by diversifying your customer base, so you don’t rely on just one group of customers.
- Optimise your processes: think about how you manage and store information like financial records or simple daily processes. The more you can show, the higher the confidence in the business. A system like Countingup allows you to streamline your financial management to increase efficiency (see more below).
Save time on admin and focus on creating value
With the Countingup business current account, it’s easy to keep organised when it comes to your finances.
The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. You’ll receive real-time insights into your business finances with profit and loss reports, tax estimates, and the ability to create professional invoices in seconds.
You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward.
Find out more here.