Many entrepreneurs only begin to think about the value of their business when it is time to sell or hand over to the next generation. The smart thing to do, however, is to value your business at regular intervals and use the information to better manage your business.
This is because business valuation is also a diagnostic tool that tells you how your business is doing.
Three reasons why you should value your business at regular intervals
It is worth having your business valued as soon as it is up and running and then at regular, 3–5-year intervals. Knowing the value of your business is especially important if you are thinking of selling your business.
Business valuation can also be used as a diagnostic tool to measure the growth potential of your business. Even well-performing SMEs can be underachievers. Your business could be ready to grow, but you might miss these opportunities if you do not measure the value of your business at regular intervals.
Regular business valuations also help to keep your business running smoothly. If you have to shut up shop due to illness or some other unexpected reason, your family will know exactly what your business is about and what it is worth.
How to determine the value of your business
The value of your business depends on, for example, your operation, stocks, machinery, equipment, intellectual property rights and staff.
In practice, there are two ways to measure the value of SMEs: intrinsic value and net asset value, which is the value of an entity’s assets minus the value of its liabilities.
What gives a business its value is the future that can be achieved through it. A business’s intrinsic value is based on how much a new owner can earn from the business in the medium term. To calculate the intrinsic value of your business, you need to have a realistic forecast of profits over, for example, the next five years.
If you are thinking of selling, you will most likely base your minimum price on your business’s net asset value, which is the value of its assets minus the value of its liabilities, while buyers will be more interested in your business’s intrinsic value, which determines the maximum price that they are willing to pay.
In addition to a valuation based on your income statement, the buyer’s financing and motivation also play a role.
Avoid the most common pitfalls when valuing your business for sale
Every sale is different, and the way you should value your business also depends on the circumstances. In order to not scare away potential buyers, you should price your business as close to its realistic market value as possible.
The value of your business is not the same as its price. The price is a figure agreed between the seller and the buyer, and it can be higher or lower than the value of the business.
If you need help with valuing your business, talk to professionals!