There are two ways to profit from a business, one is from the income it can generate year by year, but the other is from its sale.

Business owners tend to be on a spectrum of interest on what they might get from selling their business. For some, the business sale is the main focus and the business valuation is clearly in focus. For others the eventual sale is too far distant to think about or there is an assumption that the business cannot be sold.

On this second point small business owners may be surprised to discover there is a market for businesses with even quite modest turnover as evidenced on the following marketplace websites:

• https://www.nationwidebusinesses.co.uk/

• https://www.business-partnership.com/

• https://www.business-sale.com/

From our point of view, business owners work hard to establish themselves so walking away from the value they have created doesn’t make sense. For some knowing the value of what they are building could be the difference between stopping trading and continuing.

For these reasons we encourage all clients to have some understanding of what they might get from selling their business.

Business valuation

Unfortunately there is no easy or one-size-fits all way to value a business and different sectors tend to favour different factors. What follows are some of the most common valuation drivers and methods:

Underlying Profit - Here the idea is that you look at profit over the preceding years adjusted for one off ‘Extraordinary’ costs, ‘Extraordinary’ income and the value of the owners time. Extraordinary costs would include things like a new website or development costs of a new product. Conversely Extraordinary income is any revenue that is a one off. These costs are removed from the profit calculation whilst the market value of the owners time is introduced. The idea here is to understand what extra cost the business would have if the management was a salaried post.

The underlying profit is then given a multiple to arrive at the business value, typically 3 - 5 depending on other factors.

Recurring Revenue - Businesses with a stable recurring revenue like accountants or lettings agents will often use the value of recurring fees as the basis of a valuation usually with an industry specific multiple.

Assets - All business valuations will be affected by the state of the balance sheet. Businesses holding a lot of assets - cash in the bank, equipment, stock and few liabilities will obviously be worth more to prospective buyers.

Beyond this a business may have significant intellectual property, trademarks, technology or even particular client relationships that add to the value.

Growth - All businesses that are growing fast have extra value to buyers. Often this will affect the multiplier that is applied to underlying profit or recurring revenue.

Sustainability - Here prospective buyers will try to assess the likelihood of the business collapsing when the current owner departs. The more stable the workforce, the more ingrained and sturdy the processes of the business, the higher the value.

Getting Help

A Google search will reveal a number of free online valuation websites. The problem with these is that they tend to be somewhat simplistic and are set up more with the intention of gathering contact information than providing accurate valuations.

Accountants are trained to value businesses using underlying profit and the balance sheet but often miss knowledge of the market and industry specific valuation methods.

Our recommendation therefore would be to work with a business broker. Not only will the broker have an understanding of the value of your business, but also the state of the market and the mechanics of the sale. Often there is an amount of free consultation available on the basis that when you do come to sell your business, likely you will return to them.

The one we can recommend is Business Partnership.