New research by Marktlink suggests that around 33 per cent of UK business owners are unaware of the value of their company – only slightly lower than the European average figure of 40 per cent.
While you are not alone if this applies to you, you must know what your business is worth.
Why? Let us show you.
Know your worth
The value of your business is not just a number, it is a measure of growth and what you have achieved since founding your company.
For this reason, the total value of your business is an important metric by which growth and future potential can be measured.
There are many scenarios which might require you to know the exact value of your business or at least understand its market worth, including:
- Strategic planning – Your business’ value, alongside data, such as revenue, turnover and profit, can help you to make strategic decisions including investments and operational improvements, as well as provide a measure of success for these initiatives.
- Sales or acquisitions – Most sales of your business will require an accurate valuation to ensure a fair price for both you and the buyer that reflects market rates.
- Investment opportunities – Similarly to buyers, investors will need to know the value of your business to assess risk and potential return on investment (ROI).
- Financial reporting – Some financial statements require an accurate valuation of a business, particularly when it has been passed on to another person as part of an inheritance, making a valuation crucial to succession planning.
Calculating the value of your business
Put simply, a business’s value is the financial value of everything owned by your business.
While this may seem straightforward, there are a number of techniques used to calculate the value of a business depending on its sector, its structure, the reason for valuation and the type of assets it possesses.
These include:
- Asset valuation – One of the more straightforward forms of valuation, this involves adding up the total value of all assets owned by the company, including tangible assets such as land and intangible assets such as brand reputation.
- Discounted cash flow – A more complex and sophisticated method, DCF requires accurate cash flow projections as it calculates how much a business may be worth in the future by determining the present value of future cash flows.
- Market capitalisation – Used for incorporated companies with shareholders, this method multiplies current share price by the total number of outstanding shares, which can provide a useful picture long-term, but may be impacted by market volatility as a one-off calculation.
- Revenue or earnings multiplier – If your business is new and lacks earnings history for other methods, this model calculates your current revenue and multiplies it by an industry-specific standard, typically between 0.5 and 2.
Different methods will be suitable for different types of businesses.
For example, asset valuation may result in a lower price for a business that holds low levels of tangible assets but has significant future growth prospects or ‘goodwill’ attached to its name.
It is best to seek professional advice when valuing your business to ensure that you have accounted for every asset and that you are applying the method correctly.
Business valuations can be complex and, as an important benchmark for the growth and success of your business, must be accurate to hold value for investors, buyers and your own strategic decisions.
To get to know the value of your business and stay prepared for sales, investments and market changes, get in touch with our team today.