A valuation specialist should evaluate your small business in Australia. They can offer a unique insight into your business that can be used to sell or make changes to improve your assets.
A small business is often your intellectual property, something you have poured time and money into. So, you will want to know how to value your business. Today’s blog post outlines how to value a business, the factors influencing a value, and the common valuation methods used.
What Factors Can Influence The Value Of A Small Business?
Tangible assets, financial metrics, liabilities, and intangible assets can influence the value of a small business. These factors are often used in conjunction with one another to see the value of a small business.
We have more information about these factors below.
Intangible business assets are resources that don’t have a physical presence but add long-term value to your business. These are your brand, reputation, company age, client value, copyrights or trademarks, team strength, and product type.
Intangible assets can be tricky to get an accurate valuation; after all, how do you put a price on your reputation?
Tangible assets like machinery, inventory, and property are necessary for your business. Also known as tangible fixed assets, these are necessary for you to run your business.
Most businesses come with a set of liabilities. These are something the company owes, usually cash. These can also be debts that your business owes and are factored into your valuation. The more liabilities you have, the more debt must be settled before the business is sold or settled by the new owner.
Knowing what your company owns or owes when valuing your business will ensure the valuation is as accurate as possible. Look at any business asset you have to confirm whether you own it or not.
Your annual net profit, revenue, and other financial metrics can influence the value of your business.
What Are The Most Common Methods You Can Use To Calculate The Value Of A Small Business?
Small businesses are commonly valued by their price earnings ratio (P/E) or multiples of profit. The p e ratio is best for companies with an established annual earnings record. The company’s share price is compared to its earnings per share, with high rates, meaning that investors expect high growth rates.
The multiple of earnings uses the company’s value multiplied and applied to the company’s earnings. A company with earnings of $1 million with a multiple of six times is valued at $6 million.
Several other methods are commonly used to calculate the value of small businesses listed below.
Valuing A Business Using The Market Approach
The market approach looks at the fair market value of the business. An evaluator will survey recent transactions of similar businesses, making comparisons where appropriate. No two businesses are the same, so there will always be discrepancies.
The market approach is based on publicly available data on compatible transactions. There are fewer assumptions made than other approaches. But there is a downside: it can be impractical if there aren’t many compatible transactions, like private companies or niche markets.
Valuing A Business Using The Asset Approach
The asset approach looks at the net asset value of a business to value it. It is typically used for a real estate agency business, investment holding companies, and capital-intensive operating companies.
The identifiable assets fall into the following categories, which are used to provide a valuation of the business:
- Financial Assets
- Real Estate
- Tangible Real Property
- Intangible Assets
It is an intuitive approach to valuation based on the market value of a company’s equity. You should have a valuation expert thoroughly review the balance sheet and make adjustments where necessary to reflect the market value of underlying liabilities and assets.
Valuing A Business Using EBITDA
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation and can be used to value a business. It removes external accounting factors and non-operating expenses so stakeholders can focus solely on the business’s operating performance. Doing so lets you see an approximate value of the business’s cash flow.
While it is an excellent way to see a business’s operational efficiency, EBITDA ignores working capital requirements, excludes capital expenditures, and lacks standardisation.
It can be a crucial guide when purchasing a business, especially if you want to see their financial health. You can read more about Business Valuations Based on EBITDA here.
Valuing A Small Business Using Net Profit
You can use net profit, the money a business makes after expenses, taxes, and operational costs, to value a business. The net profit shows a business’s effectiveness and profitability, which are vital in evaluating its value.
There are several benefits to using a net profit to see the value of a business. It shows you the complete asset assessment, validation of financial statements, and the efficiency and profitability of a business.
But it can be misleading as it won’t show you every part of the business’s potential or performance. Net profits can also be susceptible to accounting manipulation, making the company seem more profitable than it is. The method overlooks cash flow and non-cash items and ignores the market and industry conditions.
You can learn more about this in our Business Valuations Based on Net Profit blog post.
Valuing A Small Business Using Revenue
Business value can be determined through revenue, the business’s total money. It is a vital indicator of the health and financial performance of the company.
The Times Revenue Method is one of the most popular business valuation methods used to assess how much a business makes. You multiply the company’s current revenue by a multiple or number to determine potential future profits, which can show the value of a business in the long term.
Using revenue to value a business is simple and easy to calculate, is comparable across industries, and focuses solely on top-line growth. However, it overlooks profitability, neglects other financial indicators, and isn’t industry-specific. In a separate blog post, we have more information about Business Valuations Based on Revenue.
Valuing A Small Business Using Turnover
There are three types of turnover: industry, cash, and labour. These can monitor a business’s purchasing, sales, and inventory cycles, providing a business valuation.
This approach is one of the simplest to determine a business’s value, focusing on average weekly sales. It is an easy method, with industry specific insights that allow you to make an informed decision.
However, it isn’t as comprehensive as other valuation methods, relies on market conditions and trends, and doesn’t apply to all businesses. You can use our blog post, Business Valuations Based on Turnover, to learn more.
What Checks And Documentation Need To Be Completed To Provide An Accurate Business Valuation?
Surveys, compliance, cash flow analysis, and risk and value driver assessments must be completed for an accurate business valuation. We explore this in detail below, or you can head here to read more about our business valuation services.
Survey And Scorecard
A survey and scorecard service will comprehensively overview your business performance. The scorecard is easy to understand, showing your business’s strengths, weaknesses, and areas for improvement.
Risk And Value Driver Assessment
This assessment lets you see the key factors driving your business’s value and risks. These can help you develop strategies to enhance your business’s worth.
Profit And Cash Flow Analysis
Profit and cash flow analysis allows you to look at your finances to see how to increase profits and improve cash flow management.
Benchmarking checks compare your business to others in your industry. This will show you how your business compares to the competition. You can see where you succeed and which areas you could improve, allowing you to become a more successful and competitive business.
Compliance lets you check that your business valuations adhere to industry standards and regulations.
Value Improvement Solutions
By analysing your current performance, you can find opportunities to enhance value. Strategic planning, financial management, and operational improvements can unlock your business’s full potential, maximising its value.
How To Find Potential Buyers Of My Small Business?
A business broker can help you find potential buyers for your small business. They can connect you to potential buyers looking to purchase a small business. You can also ask friends, family, or other similar business owners if anyone wants to buy a small business.
Check local listings and reach out to current employers, partners, and anyone in your network; you never know who they might know who is looking to buy an accurately valued small business.