What is my business worth?

Your opinion on price may have been impacted by the price you paid for the business, the opinions of other people, the amount of time you spent building the business, the level investment made in establishing the business and fitting it out and the value of the assets included.

Let’s face it, if you invested a lot into building the business, you may have a higher figure in mind because of the blood, sweat and tears you’ve put into your business over the years.

As a general guide, many businesses are valued at between 2-times and 4-times adjusted EBITDA. This varies significantly between businesses and can be impacted by many factors that include, business types, industry focus, market trends, impacts on technology and business size to name just a few. 

Choosing a valuation method

Below are some common methods of working out the value of a business – this list is not exhaustive. If you engage a professional business broker or business valuer, they can help you decide which method is best for your business and explain any industry specific methods relevant to your business.

Keep in mind that there is no one set method, and a combination of methods can also be used to arrive at an appropriate sale price. You may also need to negotiate the method of valuation with the buyer or the financier.

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.

Industries usually come up with their own rules and formulas to value a business, so it’s a good idea to conduct research to gain a good understanding of your industry before you sell your business.

The Australian Bureau of Statistics website contains a range of statistical data grouped by industry.

B. 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.

C. Use your business’ assets to calculate value 

When calculating your business’ asset value, it’s important to include both tangible and intangible assets of your business. Tangible assets are physical things you can touch such as tools, equipment, and property. Intangible assets are things that can’t be touched but are still valuable such as intellectual property, brands and business goodwill.

After you’ve calculated the total asset value of your business, you can then use this value as an indication for how much you would like to sell your business for.

As assessing your business’ assets value can be a complicated process, it’s a good idea to talk to your business advisor or accountant for help.

What is business 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.

Calculating goodwill can be a complicated process, and different methods will give different results. Using different methods of calculation can give you an indication of the price range you would like to set for your business goodwill, and ultimately the value is what the marketplace or buyer is willing to pay.

Because it’s difficult to calculate goodwill, it’s a good idea consult a professional such as your accountant.

Take depreciation into account – If you use your business assets to calculate value, remember to take depreciation into account. Depreciation is the loss of value for your assets over time. For example, you may have purchased a computer for your business three years ago for $1000. When calculating your business’ asset value, the value of the computer will no longer be $1000 as it was when you purchased it.

Talk to your accountant if you’re unsure about how to work out depreciation of your business assets.

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