How to value a business
If you are thinking about selling your business or preparing your exit strategy, you may already have a price in mind that you think it is worth, but you may be unsure of how a business is valued. Owning a business requires a lot of commitment and hard work to build, nurture and grow your business to create a saleable entity. So, it is important that you take the time to really evaluate your business strengths and weaknesses and ensure you have done everything you can to maximise its value before you sell.
Business Valuation vs Market Appraisal
At SBX we provide all our vendors with a market appraisal, which is based on previous sales of similar businesses, earnings, industry and market conditions and growth potential. We can also refer you to a licenced Business Valuer if you require a formal business valuation for legal or financial reasons.
Determining the value – rules of thumb
Most business that are not hospitality or cash based will be valued using a “multiplier” of annual profit or revenue. This is usually one to two times the earnings of a business including the owners’ salaries, plus the stock at value. It may be higher if a business has a unique selling point or competitive edge.
Cash business can often be more difficult to evaluate, and weekly turnover is used along with the cost of rent and length of the lease to determine a business’s value. A trial period is usually undertaken for the new potential owners to evaluate the weekly sales amounts and confirm earning potentials.
What can impact your business value?
Strengths and Weaknesses
As the business owner you would be well across your business strengths but it is important to really address and fix any weaknesses that could limit the appeal or capacity to sell your business and address as many as possible before you are ready for sale.
Length of Ownership
Businesses that have been owned and operated with a good trading history are more appealing to potential buyers. If you have not owned your business for long, you will need to be upfront about your reasons for moving on.
The purchaser will require a new lease or transfer of your existing lease. Ideally the lease does not include major rental increases, which could reduce the profitability of the business. Ensure you have a copy of your current lease available, disclosure statement and rental invoices.
Profit and Loss Statements
Ensure you can provide profit and loss statements ideally for the last 3 years to show the overall performance of a business. The statements should support the profit stated in business listing profile.
Licensing and Registration
You will require a copy of your business name registration, any Development Applications, liquor licence, outdoor seating approval and any other relevant licenses and registrations that you require to run your business.
You need a full list of all equipment used by the business. If any are leased, you must either pay out the lease by settlement or declare the item, lease current balance, monthly payments, expiry date and whether the lease is transferrable. You will also need to catalogue all of your intellectual property, website domain registrations, social media accounts, brand names, etc for handover to the buyer. These are included in the “equipment” used to operate the business.
Keep stock volumes at reasonable levels. Large stock volumes also add to the total cost of a business for a potential buyer.
Ensure you have all your employee records up to date with start dates and leave and have paid all your staff entitlements to date.
Ensure you have all your intellectual property organised for easy handover and transfer, website domain registrations, social media accounts, branding.
Supplier and Customer Agreements
Consider all your supplier and customer contracts; are these all up to date, signed and documented? Forward orders and regular customer agreements contribute to the value of a business.
Goodwill is the value assigned to non-physical assets such has highly valued staff, brand appeal, customer lists, business operational procedures, social media followers, etc. These should all be considered when valuing your business.
Future Growth Potential
Have a clear understanding of what the growth potential is with the business and what a new potential owner could to do further grow and improve the business potential.
Avoid an unrealistic selling price
The number one thing that inhibits a business sale is vendors who are asking too much, some people feel if they intentionally overprice a business this will leave some negotiation room, however it can be a real barrier to find a true buyer and put many people off enquiring. Be guided by an experienced business broker who will find you the right buyer for the best price.