We often see clients that are unsure about what their business is worth when they decide to sell. They approach this task similar to what one may do when pricing a home, by looking at market comparables.
For example they may look at what other competitors or other businesses for sale are priced at online, or perhaps look at factors such as their own revenue growth or assets, trying to judge what the price would be for their business. Unfortunately, it's not quite this simple if you want to get the maximum fair value for your company.
In many cases, half or more of the company's value is in intangible assets. This includes reputation and goodwill in the market, IP or "Intellectual Property", patents, location, etc. Placing a value on these assets isn't always easy, but is necessary to get a fair market value when selling your business.
Because of these intangibles, two businesses both netting the same income can be valued very differently in the marketplace. Variables such as competitive advantage, branding and marketing, service and reputation, systems and technology, capacity for growth, and access to labour can affect the price.
Also consider the role of the owner in the business, and how much the company relies on their input.
When we valuate a business, we must look at the expenses and revenue in detail to understand whether the numbers are accurate in determining the actual financial performance of the business.
In some cases, certain expenses may downplay the true performance of a company for tax purposes; however this is not desirable when selling as you clearly wish to portray your business in the best financial light possible. These factors are taken into consideration to determine the actual worth of your business on the market.
Every business has a range of different factors that affect the market price, unique to their industry, history, and individual situations. We find that our clients are often under-valuing their own business, due to a lack of understanding of the processes behind it.
A good business valuation will take all of these hidden and overlooked factors into consideration in coming up with your true market value, and better inform the seller on how their business is performing prior to selling.