How much is my business worth?May 29th, 2013 by Dan Woodruff
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If you are thinking of selling your business you will probably start by asking “How much is my business worth?”
This is a good place to start, but we want to challenge you to think differently. We want to encourage you to think about a different question: “How much does my business need to be worth?” If you can answer this second question, you will have a much better chance of living the lifestyle you want in your future.
- Your business might not be your pension
- Methods of business valuation
- How much does my business need to be worth?
My business is my pension
If we ask a business owner what is their biggest asset, they usually answer that it is their business. If we ask them about retirement planning, they usually answer that their business is their pension.
The truth is that your business is only worth what someone else is prepared to pay for it. This can vary wildly. Therefore, it is only natural to ask what your business is worth.
How much is my business worth – methods of business valuation
No doubt your first port of call is your accountant. Your accountant will value your business according to tried and tested valuation techniques. Perhaps they will use one of the following methods:
- Multiple of income or profits
This method can use a variety of sources valid for your industry. This can lead to wildly different valuations. Typical smaller businesses are valued at 1 to 10x the adjusted net profits of the business. This multiple very much depends on your industry, the management and sustainability of your business.
- Earnings before interest, tax, depreciation and amortisation (EBITDA)
This method is used to value a company’s profits before the above are applied.
- Price earnings ratio
This is generally used in valuing larger companies listed on stock exchanges.
Whichever method you choose, you still need to trust the result. The only real way for you to find out how much your business is worth is to test the result in the market. The results might be very different to what you expect. Be honest with yourself – how much would you pay for your business?
How much does my business need to be worth?
This is the alternative perspective using Financial Planning methods. Obviously, the paper value of your business is important. What is even more important is what your business needs to be worth. Our approach is to examine how much you need to generate from your business sale to ensure that you never run out of money in the future. This is a subtle but important difference.
Think about it. If you know how much capital you need from the sale of your business, after tax and other expenses, you will have a much stronger position when it comes to sale negotiations. This figure is much more about guaranteeing your future lifestyle rather than getting the most out of the sale of your business asset.
If you can move your focus from “How much is my business worth” to “How much does my business need to be worth” you will be able to take an offer for the purchase of your business once the latter figure has been reached.
Derek ran his business for 25 years. He built this up into a large operation with 50 staff in 2 locations. At a certain point he became tired of all the hard work and thought about selling. A local competitor offered him £1 million for the business. His accountant told him it was worth £2 million. When we analysed Derek’s financial situation we told him that if he stopped earning from the business tomorrow he would need capital of £1.5 million. What this told Derek was that it would be great to achieve the valuation of his accountant, but that he could afford to take a lesser offer of £1.5 million if he wanted to, and still never run out of money.
What you can do?
In our experience many business sales fall through for a variety of reasons. However, one big reason is that the seller is not sure they can generate enough from the sale. Using financial planning you can be sure whether the business sale will be enough for you to live the life you want in the future. This is a much more secure method of examining the value of your business to you.
Of course, we can’t make your business worth what you need it to be – that’s up to you and your other business advisers.
Find out more about how financial planning can help you when selling a business – check out our business sale case study.