There is no one set method to value your business. A combination of methods can be used to arrive at your desired sale value. Below are some common methods of working out the value of a business.
Use the current marketplace value and your industry
How you value your business can depend heavily on the industry you're in, and the current marketplace value of similar businesses within that industry.
Industries usually come up with their own rules and formulas to value a business, so it's a good idea to conduct research to gain a good understanding of your industry before you sell your business.
The Australian Bureau of Statistics
website contains a range of statistical data grouped by industry.
Use the return on investment method to calculate value
For example, you have a selling price of $200,000 in mind, but want to test your return on investment (ROI) based on that price. You calculate that your business' net profit was $50,000 for the past year.
To work out the ROI, you use the formula:
ROI = (net annual profit / selling price) x 100
= (50,000/200,000) x 100
In this case, your ROI is 25%.
If you have an ROI in mind, you can use it to calculate the price for your business:
Selling price = (net annual profit / ROI) x 100
For example, if you were looking for a ROI of at least 50% for the sale of your business, and your business' net profit for the past year was $100,000, you can work out the minimum selling price you should set.
Selling price = (100,000/50) x 100
In this case, to achieve a ROI of at least 50%, you'll need to sell your business for at least $200,000.
Use your business' assets to calculate value
When calculating your business' asset value, it's important to include both tangible and intangible assets of your business. Tangible assets are physical things you can touch such as tools, equipment, and property. Intangible assets are things that can't be touched but are still valuable such as intellectual property, brands and business goodwill.
After you've calculated the total asset value of your business, you can then use this value as an indication for how much you would like to sell your business for.
As assessing your business' assets value can be a complicated process, it's a good idea to talk to your business advisor or accountant for help.
Business goodwill is an asset that is much harder to value, as it does not have a determined market price. Goodwill can include:
- customer loyalty and relations
- brand recognition
- staff performance
- customer lists
- reputation of your business
- business operation procedures.
Calculating goodwill can be a complicated process, and different methods will give you different results. Using different methods of calculation can give you an indication of the price range you would like to set for your business goodwill, and ultimately the value is what the marketplace or buyer is willing to pay.
Because it's difficult to calculate goodwill, it's a good idea consult a professional such as your accountant.
If you use your business assets to calculate value, remember to take depreciation into account. Depreciation is the loss of value for your assets over time. For example, you may have purchased a computer for your business three years ago for $1,000. When calculating your business' asset value, the value of the computer will no longer be $1,000.
Talk to your accountant if you're unsure about how to work out depreciation of your business assets.
Estimate the future profit of your business
For a buyer, the biggest value of your business will come from future profits generated. As a seller, you're more likely to sell at a higher price if you can show through your financial statements that your business is likely to be profitable in the future. This helps give a prospective buyer an idea of the returns they may expect from your business in the future.
You can estimate the future profit of your business by looking at any trends in your business finances from past years. You can also investigate the trends of similar businesses in your industry to see how your business compares and how the market is going. This information may be useful when negotiating the final selling price of your business.