The difference is those figures can be calculated very simply with a pencil and a scrap of paper if necessary (or, in my case, a spreadsheet featuring a self-indulgent level of complexity – and pretty colours), whereas the value of a business – the value of your business – is a much more subjective thing.
Valuing your business
How to value a business and maximising your business’ value is something that I explain in detail in my guide to selling a business . For now, I’ll give you a crash course with one of the most common business valuation techniques.
This method is based on the amount of profit that your company generates. To value a business you multiply it’s annual adjusted net profit by a number; the profit multiplier.
Value = Adjusted Net Profit X Profit Multiplier
Focusing on profit
The profit figure used to value a business is usually based on profit before tax. You can also use the post-tax figure, but this would mean increasing the profit multiplier accordingly (we’ll talk more about profit multipliers later).
What profit multiplier to use
Once you’ve arrived at the adjusted net profit, you need to consider what profit multiplier to use.
In the example of how to value a business, I used four (which is not uncommon), but profit multipliers can vary – anything from two upwards depending on the company, market and economic climate.
Below are some things to consider when deciding what profit multiplier to use:
- There may be conventions for your type of business – try to research trade press, or make enquiries with other similar companies that have been through the sale process.
- The lower the perceived risk, the higher the profit multiplier (and vice versa).
- The more sustainable the profit is (or is perceived to be), the higher the profit multiple (and vice versa).
- Small businesses typically have lower profit multipliers than PLCs because they are seen as a bigger risk, and shares can’t be traded as readily. This is one reason that large companies buy smaller companies; the small business will be valued at a higher rate once it becomes part of a larger organisation.
More on how to value your business
To read more on valuation methods you can download the guide to selling your business which includes explanation of the three main valuation techniques; asset valuation, profit multiplier and discounted cash flow – all in very clear and easy-to-read terms.
Article power by: http://www.krogger.co/key-value-drivers.html