As business lawyers, we are always involved in the process to value a business when a client wants to sell or merge with another business.

The age-old question is what is the business worth?

Valuing a business for sale is a team effort and involves your business’ key advisors including your lawyers and accountants.

There are a range of ways of valuing a business and we will discuss some of them here. Remember, often a traditional type of valuation method does not always have to be the basis. Some businesses are unique, and it is often hard to put a price on them.

The various methods we will look at in this article are:

• Asset value
• Future profits
• Market values
• Return on investment (ROI)
• The cost of starting a business from the ground up

Asset value

The asset value method requires you to consider the value of your tangible and intangible assets of your business.

The tangible assets are the property owned by a business such as buildings, land, equipment, and inventory which are recorded on the balance sheet.

The tangible assets can be broken down into two main categories current and fixed.

Current assets are such items as cash and inventory where fixed assets are usually plant and equipment, property etc.

Intangible assets are things that can’t be touched such as the intellectual property, goodwill, and the brand.

When you have to calculate goodwill, it will require expertise as it has to take into account a number of matters including brand recognition, customer list, reputation, etc.

You must also consider depreciation when calculating the value of assets.

Assessing the asset value can be a complicated process and you need to make sure that you do not undervalue any of the assets.

Future Profits

Any buyer will always be very fixated on the future profits unless their motive is to remove your business as competition.

This can be difficult to calculate as you need to show a history of profit and generally a continuous growth over the period prior to the sale.

It will also have to take into account the market you operate in and the potential future strength of that market.

Market Value

This can be difficult as it requires consideration in detail of the industry and environment that you are operating in and where you are positioned in that sphere.

Often various industries have their own methodology, so it is very important to ensure you are aware of the industry and seek expert advice in this regard.

Return on Investment (ROI)

Return on Investment or ROI, uses as the baseline of your net profit to calculate its value and it can be based on the selling price you want to achieve or the ROI you set.

For example, if you want to sell your business for $500,000.00 and your net profit was $100,000.00, then you calculate it as follows:

100,000.00/500.000.00 x 100 = 20%

Therefore, the ROI is 20%

If on the other hand you want to sell it on a ROI of 40% and the net profit was $100,000.00, again you calculate it as follows:

100,000.00/40 x 100 = $250,000.00.

Therefore, to achieve a return of investment of 40% you will need to sell the business for $250,000.00.

The cost of starting a business from the ground up

This method requires you to calculate the cost to build in the industry you operate in and in the current market and economic conditions.

To do this you will need to look at the costs to set up the business before opening the doors and taking not account such matters as purchasing stock, equipment, tools, marketing materials, lease costs, product development, staff recruitment, websites and online presence, licences and permits to name a few.

This type of valuation can be very subjective and is often difficult unless it is a young start-up business or one that is in trouble and needs to sell.

The keys takeaways

When you are looking at selling it is important that you get expert advice to assist in assessing the best valuation method for your business.

I often tell clients that the key issues in any consideration for a purchaser when looking at a business is:

• Revenue and potential for growth
• Strength of the staff
• Brand reputation
• Customers/clients and their level of satisfaction and loyalty to the business
• Position in the marketplace and how do you stand out from the competition
• Market share

How can FC Lawyers help?

The team at FC Lawyers have been assisting business clients for 30 years whether selling or purchasing a business. Our team are experienced in advising on valuations of businesses and working with our clients’ other professional advisors including accountants and business brokers.

Contact our team today to discuss your needs whether selling or buying a business.