Figuring out the Value of Your Business: A Quick Guide

So, you want to know the answer to the burning question on any business owner's mind… what is my business worth?.

This blog will help break down the basics, which will give you a starting point to figure out the value of your business.

Net Assets: Your Business's Financial Foundation

The value of your business isn't just a random number—it's tied to its net assets. Ask yourself: Does your business boast a strong balance sheet? Or is there a mountain of debt waiting for a potential buyer?

Dig into the details: How well are trade debtors and stock balances managed? These are the key factors buyers consider when valuing your business.

To boost your business's appeal, give your balance sheet a 'spring-clean.' Get rid of obsolete stock, clear unrecoverable trade debtors, and ensure your fixed asset register is up to date. A tidy balance sheet speaks volumes to potential buyers.

Profitability: Beyond the Balance Sheet

Now, let's talk about profitability. While the net asset value is a baseline, there is more to it than just the numbers. Enter "goodwill"—the intangible assets that contribute to your business's success, like brand reputation, customer relationships, or a skilled workforce.

Buyers are willing to pay extra for goodwill, and this usually ties back to profitability.

They'll scrutinise your accounts, looking at profit levels and year-on-year margins. To boost your business's value, focus on maximising high-margin sales and eliminating loss-making lines.

Buyers will then apply a ‘multiple’ to past, current, and possibly future profit levels, to attribute an amount to the goodwill of the business. The multiples can range anywhere from 2 – 7, depending on the level of risk assigned by a buyer. Higher multiples tend to be achieved where the business has a unique advantage in the industry but as a general rule of thumb, you can expect to achieve anything between 3 and 5.

Non-Financial Principles: The Intangibles Matter

Beyond the financials, buyers also consider non-financial aspects. Clear management accounts, a robust operating structure, and a strong staffing setup all contribute to a buyer's confidence. These non-financial elements give buyers insight into the level of risk they might be taking on, influencing the final valuation.

Set Realistic Expectations

In the end, valuing your business boils down to these fundamental principles.

Your balance sheet provides a snapshot of the minimum value you should expect.

But remember, goodwill is subjective and varies based on a buyer's vision. Have a realistic expectation of your business's worth to ensure you don't undervalue the hard work you've put in—potentially a lifetime's worth.

Ready to explore the value of your business further?

Reach out to us at hello@horizontas.co.uk!