smallbusiness.co.uk: Helping your business think big

There are a range of factors that can affect the value of your business, and a variety of methods you can use to assess how much it is worth.

Businesses that have a record of sustainable profits are often valued by what is termed a multiple of earnings. This is when profits are adjusted for any one-off or unusual items, so you can estimate what normal earnings would be.

“Multiple earnings differ depending on the nature of the business or the industry you are operating in. You also have to take the view of the buyer into account. A trade buyer would buy your business based on a lower multiple than a strategic buyer would,” advises Marc Fecher, director at Devonshire Corporate Finance.

Potential buyers can be interested for a whole range of reasons, such as increasing volume, geographical expansion, diversification, additional skills or acquiring profile.

As Fecher outlines, one of the major influences on the price buyers pay will be their confidence in the underlying profits they are acquiring. This confidence can come from demonstrable evidence of certain qualities within the business that, for example, attract high calibre staff and create more business from new and existing customers.

If your business has significant tangible assets, such as property, then an asset valuation might be a more appropriate way of valuing the business. Start by valuing the assets stated in the accounts – this is known as ‘net book value’. The cost of creating a business that is similar to yours can also be one way of valuing a business.

Remember that potential buyers may use a range of methods to arrive at a valuation.

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(15/4/04)