How to Value a Business for Sale – An Imperative Guide
Valuing a business can be complex if it’s in its infancy because the founder is still in control of how it will develop. This all comes down to future prospects, past training and management skills, history of customer service, practicality (to do with the industry or sector) and recent success stories.
If you are looking at valuing it when it’s mature, there are many more proven factors available. One would be how much profit has been made over say 5 years. But this isn’t always reliable seeing that even big brands can fail. On their own these figures don’t give enough information on what support systems may have contributed towards the profit.
To give a really accurate value, you need to do some research. Look for any past financial reports and study them. The balance sheet gives you an idea of the level of equity but it doesn’t show hidden assets such as possible patents or secrets which may be valuable trade knowledge that is owned by the company. If you can make a profit from these unique innovations then they should be added to the valuation totals. It’s not wise to use multiple sources for this kind of information as it will limit your ability to create a rounded picture. This could lead to an overvaluation because much of the information available will be second hand, whereas direct primary evidence is always more reliable – especially when dealing with sensitive matters like those concerning how much a business is worth.
The various ratios that are used to value a company are all legitimate – but only if they meet your stated objective. The net profit ratio is often used to value companies, though it’s not the most accurate of measurements because it leaves out many factors. But you can’t place too much weight on this since there are so many other important markers that need to be looked at if you want an exact figure. One common mistake made by investors is to try and quantify everything, which hampers their ability to come up with a sound decision. If you think that the problem lies in the fundamentals then maybe they just don’t apply here or perhaps they’re not as important as you first thought.
Valuing a business is only dependent on being able to justify the figures that are put before you. You’ll need to consider many factors if you want an accurate appraisal of how much a business is worth. There isn’t any one accepted way to do this so you should cross reference your findings with another professional investor if it’s appropriate. When you’re satisfied that all evidence culminates in a single believable conclusion, then it’s time for some decisions.
If these assets are more than tangible then they will appear on the balance sheet as intangible assets which can give discounted valuations of up to 50%. But make sure you know what these assets are first – even though there may be numerous amounts of them available. If there are none, or very little, then maybe the valuation method needs updating.
It’s important that you know how to value a business, especially if you’re thinking of selling it. Saying that it’s too valuable is often an unrealistic answer and could be seen as nothing more than an attempt to sell the company for more than it should be worth. You need to make sure that all your figures are accounted for accurately because even one mistake can devalue everything.
The two main ways used to establish how much a business is worth are discounted cash flow (DCF) and book value (BV). The first calculates what future cash flow projections will total over time while the second only looks at the balance sheet figures which leaves out intangible assets among other things – so these figures aren’t always reliable, unless they’ve been updated recently. If you know how to value a business then you’ll see that there’s no single way of doing it.
The DCF method is somewhat more complex, though these factors can be adjusted depending on what parameters need to be included. It will usually take into account the future average growth rate over time and an equity multiple – which tells you how much investors think they’re paying for each dollar of earnings of the company. But make sure all of this information is based on credible evidence; if it isn’t then maybe your assumptions are too high or low.