Valuing a Business
Working out the value of a business is important, as it will help you decide on the selling price of your business or to decide how much you are willing to offer on a potential business for sale.
Prepare your Business Information
You’ll need a range of business information to value your business properly. If you need help with preparing your documents and can’t afford a professional, consider asking friends or family members with bookkeeping or business experience.
Having your business documents organised and up to date makes a great first impression too!
Below is a guide to the type of information you will need.
Finances and assets
- Details of physical assets such as machinery, buildings, equipment, and stock
- Financial statements such as tax returns, annual turnover, debts, profit & loss statements
- Details of other assets such as goodwill towards the business
- Legal documents such as leases and insurance policies
- Registration papers such as business name certificates, Australian Business Number (ABN) registration papers, licenses, permits, and any other papers that demonstrate you comply with industry and government requirements
Business profile, procedures and plans
- Sales information such as sales reports
- Business history such as start date, ownership changes, and location changes
- Business procedure documentation such as marketing, staff roster and customer service procedures
- Other details such as opening hours and whether the business premises are owned or leased etc
Staff, supplier and customer information
- Employee details such as job descriptions, skills and experience and pay rates
- Supplier details such as supply agreements and supplier prices
- Customer details such as customer numbers and customer details.
Decide Whether To Get Professional Advice
Consider getting professional advice on how to value your business through an accountant or a business broker. Your current accountant may be able to provide you with business advice and/or a free business appraisal.
Common Methods of Valuing a Business
Keep in mind that there is no one set method, and a combination of methods can be used to arrive at your desired sale value.
A. Look at current marketplace value and your industry
How you value your business can depend heavily on the industry you’re in, and the current marketplace value of similar businesses within that industry. Do your own research, and look at other similar ‘businesses for sale’ in other areas – this will give you an idea of what your business could be worth.
B. Valuation based on annual net profit
Some people prefer to value businesses based on a business’s annual net profit. As a general guideline, businesses are valued at 2-3 times their annual net profit. Sometimes higher, and sometimes lower, depending on how secure the business industry is.
For example, let’s consider a business that has an annual net profit of $50,000. The standard valuation for the business would be 2-3 times net profit, making the business value between $100,000 and $150,000.
C. Use the return on investment method to calculate value
The return on investment (ROI) method uses your business’ net profit to work out the value of your business.
ROI = (net annual profit/ selling price) x 100
For example, you have a selling price of $200 000 in mind, but want to test your ROI based on that price. You calculate that your business’ net profit was $50 000 for the past year.
To work out the ROI, you use the formula:
ROI = (50 000/200 000) x 100
In this case, your ROI is 25%.
If you have an ROI in mind, you can use it to calculate the price for your business:
Selling price = (net annual profit / ROI) x 100
For example, if you were looking for a ROI of at least 50% for the sale of your business, and your business’ net profit for the past year was $100 000, you can work out the minimum selling price you should set.
Selling price = (100 000/50) x 100
In this case, to achieve a ROI of at least 50%, you’ll need to sell your business for at least $200 000.
D. Find out the cost of creating your business from scratch
The cost of creating your business from scratch can be used as a benchmark for valuing your business. This is the estimated cost to build a similar business in your industry from scratch within the current market. To calculate the cost, you’ll need to include all costs related to starting from scratch, including the costs of:
- buying stock
- buying equipment and tools
- getting licenses and permits
- recruiting, training and employing staff
- developing products
- marketing and promotion
- buying or leasing premises
- setting up an online presence etc.
What is Goodwill?
Business goodwill is an asset that is much harder to value, as it does not have a determined market price. Goodwill can include:
- customer loyalty and relations
- brand recognition
- staff performance
- customer lists
- reputation of your business
- business operation procedures.
It can be difficult to calculate goodwill as it’s something that differs from one business to another and there is not set rule for valuing goodwill. Goodwill is best determined by you as the owner of the business. Your accountant should also be able to assist you with this.
Note: Goodwill is only worth as much as someone is willing to pay for it.
Free Online Business Valuation Tools and Calculators
Free Online Business Valuation Tool
Free Online Business Valuation Tool
FREE Business Valuation App (download)