What your business is worth and why it matters now
Updated: 1 day ago
You have a figure in mind. But could you explain how you arrived at it? Understanding what drives your business's value gives you a better basis for decisions long before you're ready to sell.
Ask an owner-manager what their business is worth and there's often a number ready to hand. A multiple of profit picked up from another owner's sale, perhaps, or an old estimate adjusted upwards as the company has grown. The trouble is that neither tells you whether the figure stands up for your business today.
How valuations work
The right valuation method depends on the business and why you need the figure. For an owner-managed company, there are a few main approaches to understand.
A common starting point is a multiple of earnings, often EBITDA: earnings before interest, tax, depreciation and amortisation. Choosing the multiple takes judgement. How much does the business depend on you? Is the income predictable? Would losing one customer make a serious dent in profits? These factors shape the risk a buyer takes on and the multiple they're prepared to pay. Another company's multiple isn't a reliable shortcut.
For businesses with substantial property, equipment or stock, an asset-based valuation gives more weight to what the business owns. Discounted cash flow takes a different approach: it values the cash the business is expected to generate in future in today's money. Long-term contracts and predictable income help provide a sound basis for those forecasts.
A considered valuation tests the assumptions behind the figure. That includes comparing methods and, where suitable information is available, checking against sales of similar businesses.
What drives the value
Profit matters, but it doesn't explain the whole price. Two businesses with similar earnings can have very different values because one is easier to take over and less exposed to risk.
Recurring revenue gives a buyer more visibility than a business that starts each year having to win its income again. A broad customer base reduces dependence on a single relationship. A management team that runs operations without you makes the handover more credible. And a record of growth, supported by clear figures, gives substance to your forecasts. These are the details behind the multiple.
You can work on these things well before you intend to sell. Building a management team or reducing reliance on one customer takes time, so knowing where to focus now is valuable in itself.
Why the number matters before a sale
A valuation gives you a way to test whether the decisions you're making are building the business's value. It also exposes dependencies that are easy to overlook when trading is going well.
Take a large new client. The extra income is welcome, but how much of the business will depend on keeping them? Or consider a process that only you understand. It works while you're there, but what happens when someone else takes over? A valuation brings those questions into view. It also provides a starting point for discussions about key person insurance, shareholder protection and inheritance planning. If the business has grown but its value hasn't, find out why.
Start with a reasoned estimate
Ask us for a reasoned estimate and a clear explanation of what drives it. Then identify the two or three changes that would make the biggest difference. The purpose of the valuation will determine whether you need a formal exercise, but you don't need to wait for a sale to begin that conversation.
