Whether you have decided to sell or buy a company, or simply want to know how much your company might be worth, there are a number of conventional ways to value a business.
In this article, we look at many of the intangible factors which should be considered when valuing a company, and often have more of a bearing on the real value of a business than any formulae can ever do.
Clearly, the financial performance of the business, both past and present, is of major importance to a valuation. This area can more easily be assessed using standard valuation techniques, and all financial information should be thoroughly examined during the due diligence process.
How strong is the underlying economy? This can have a significant bearing on the confidence of potential buyers, as well as having an impact on financial performance at the time of sale. How vulnerable is the business to economic uncertainty in general?
Are there any particular industry trends which may add or detract value from the business at the time of valuation? Is there a strong market for the company’s goods or services?
Is the business at risk from any new legislation or regulations that any parties to the sale should be aware of, or changes to existing rules?
Who runs the company at present? How much is the business reliant on key personnel, particularly in the case of micro-businesses? If the current owner is planning to leave the business upon sale, how much will it cost to replace that person. This is often overlooked during the valuation process.
Why is the business for sale?
What has motivated the sale of the business? Are there any underlying issues that should concern a buyer, or is it purely a sale to realise a profit, or due to retirement?
Current owner’s attachment to the business
It is fairly typical for owners of small companies to value their businesses at a higher value than someone unconnected might do. This is only natural, especially if a business owner has built up an enterprise from scratch. However, you should always try to be objective if you are selling a business, and don’t be offended if prospective buyers ask detailed questions about how the business operates.
Goodwill / Reputation
No formulae can factor in the value of intangible factors such as the reputation a company has built up over time, the strength of the customer base, or the value of any brands it owns. In some cases, things like trademarks can be as valuable to a buyer than all the tangible assets of a business combined.
How competitive is the industry the company is in? How many direct competitors does the business have? How is the business performing compared to its competitors?
Market for buyers
How many potential buyers are there for the company? Is the industry one which sees a large number of businesses changing hands?
If the business in one which could pass on liabilities, such as accountancy firms, IFAs, and other professional advisory businesses, the risk of having to deal with past liabilities will be factored into the amount a seller will be willing to pay.
These are some of the main questions which should be asked if you are looking to buy a business. If you are selling, you will be expected to provide answers to all these questions, and more.
Also, try our related article, on the most commonly used business valuation methods.