When selling a business, determining the price at which you should sell isn’t as easy as going on how much you feel it’s worth — in that case, most businesses would be priceless. The fact is that unless you have your business properly evaluated, you can’t actually put it up on the market at an accurate price. You could either put it on too high and chase potential buyers away or put it on too low and be taken advantage of. So, you can see why having a proper valuation is so important, but how is a business evaluated?
1. Current Market Value
One of the first methods you can use to determine your business’s value is to determine its current market value in your industry. If there’s a prediction of future growth in your industry, then this is generally a good sign already. Take the time to research further into the need for your services in the market and consider how relevant and future-proof they are. Check out the statistics provided by the Australian Bureau of Statistics, too; they may provide some valuable insights into the current market condition that can give you an idea of your business’s market value.
2. Return on Investment (ROI)
Calculating the return on investment of a business is also a useful way to determine its value. For example, a business that shows a larger profit margin in regard to its costs generally demonstrates a healthier and more attractive business to investors, which could increase its value. This is how you’d work your ROI:
- ROI= (net profit/selling price) x 100
3. Asset Valuation
Your business’s assets, both tangible and intangible, and its liabilities are all taken into consideration when a valuation is done. Calculating the value of your assets is done by taking the value of the assets and subtracting your liabilities from that. If you’re left with a positive figure, this may improve your valuation. The opposite applies if your liabilities outweigh your assets.
4. Comparable sales method
If you’re trying to get an idea of how much your business is worth, do some research and take a look at how much other businesses in the same industry and at the same level as your business sold for. For example, say you’re in logistics. Currently, you have a fleet of 10 vehicles transporting goods across Melbourne. You would need to compare your business to another logistics company (or a business in a similar industry), with a similar capacity to get a more accurate estimate. Comparing your business to a company with a fleet of 100 vehicles would be realistic.
5. Entry cost valuation
Consider how much you would need to start your business from scratch, given the current market conditions. Creating a benchmark in this way could give you a basic understanding of your business’s worth, providing you with a foundational price to work with. In your calculations, include information like licensing fees, the equipment needed, tools and various devices, permit costs, the leasing or purchasing of property, the cost of recruiting employees and training them, as well as marketing and promoting your products or services.
All of these aspects add up relatively quickly and may provide you with a better understanding of how much your business is worth.
6. Calculate EBITDA.
Working out your earnings before interest, taxes, depreciation, and amortisation (EBITDA). might not give you an exact valuation for your business, but it’s an integral component of calculating its value. EBITDA helps businesses calculate their profitability apart from their liabilities like debt, state mandates, and other asset-based costs. By working out your EBITDA, you’ll essentially be able to calculate a more accurate ROI and get one step closer to an accurate price for your business.
What is the difference between small business valuation and corporate valuation?
The biggest difference between the valuation of a corporate business and a small business is that small business values can remain consistent over a long period. In contrast, a corporation’s value may change due to cash reserves and tax liabilities. Lloyds corporate valuation Melbourne can assist businesses with getting a proper valuation done and can help improve the value of their businesses, too.
Final Thoughts
Never skip out on your business valuation to ensure you get the best price when selling your business. It’s essential for determining the right price to put your business on the market for. This way, you will know how much it’s worth so you can draw in the right buyers and avoid being taken advantage of.
