How to evaluate your small business successfully: Whether you are putting the business up for sale, trying to attract investors or want to understand its growth, successful valuation is important but what actually is a business valuation?
In short, a business valuation will help you to understand the market value of your business by using various measurements. This can be extremely useful for entrepreneurs or small business owners who are attempting to buy or sell a company and with over 5.5 million small businesses in the UK, you’ll want to make sure you buy or sell the right one for the right price.
How to evaluate your small business successfully
To understand what is used to successfully complete a business valuation, you may consider working with specialists in valuations but for the basic things to consider, here are our top 4 factors that can influence your business’ valuation.
Factors that influence it:
1. Price to earnings ratio
This refers to the ratio of a company’s share price to the company’s earnings per share. This ratio is particularly helpful in deciding whether or not a business is overvalued or undervalued. This method can be tricky to begin with but once you understand the price to earnings ratio, anyone can do it.
2. Entry cost
This is probably one of the simpler methods; entry cost is all about working out how much it would cost to set up a similar business to the one being valued. There are many things to consider in this valuation such as how much would it cost to build up a customer base, recruit staff and develop your own products to compete in the market.
Once you have a figure for these costs, you must consider where savings can be made and subtract that from the previous number mentioned and with that you have your entry cost. Now you can see if it is worth buying this company or setting up a brand new one.
3. Value the assets of a business
A great choice of valuation for stable and well-established businesses. Valuating the assets of a business means working out the net book value of the business and then considering the economic reality of the assets to see how they would be valued in the current market.
4. Discounted cash flow
Only suitable for a mature business that has predictable cash flow, this is perhaps one of the more complicated methods. This method is about estimating what future cash flow would be worth in today’s economic climate. This method accounts for the risk and time value of the investment by showing you the earning potential of a business.
As with any deal, it must be considered that a business is only worth what someone is willing to pay for it. For this reason, it is vital that you create a detailed valuation that can cover all bases so that you have all the power when it comes to negotiating a deal.