How to value a business for sale

Remay Villaester (May)

You’re looking to sell your business, but how do you go about it? The first thing you’ll want to do is get an idea of how much it’s worth.

This can be tricky, but here we’ll show you a range of ways to value a business. By putting in the time and effort to do it right, you can avoid over or underestimating its actual value. This should set you up for a better chance of a timely sale, at the best possible price.

First off, let’s look at where to start when it comes to valuing a small business for sale.

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Ways to value a business

There are a number of ways you can put a figure on what a business is worth, by looking at sales, profit projections, tangible assets and more.

We’ll take you through some commonly used methods and you’ll be able to decide which best applies to the type of business you own.

1. Valuation based on assets

If your business has lots of tangible assets e.g. manufacturing or property firms, then it might be a good idea to value based on these.¹

Work out the Net Book Value (NBV) by totalling the assets listed in the business accounts, adjusting their price according to age and current market value. You should also discount any outstanding debts unlikely to be paid.

2. Valuation based on entry cost

You could value based on how much someone would need to invest to start up a similar business to yours.¹ To work this out, total the start up costs and tangible assets, as well as costs associated with working capital, product development, staff recruitment and training (as applicable).

3. Discounted Cash Flow (DCF)

This method is best suited to businesses with stable or growing earnings. To work out a DCF value, you make predictions about your business’ future revenue and profit.

Then, you determine the worth of the business, taking into consideration today’s value of future cash flows. This works on the principle that cash today is worth more than cash in the future, because of its investment value.

4. Can turnover be used for valuation?

What is turnover in business valuation, and how important is it when it comes to putting a figure on your business?

This is when a value is placed on a business according to sales, and can be a good indicator of the popularity of your product or service. This type of valuation can provide a good rough baseline for many business owners to start with.

If your business is young and you don’t have a full set of company accounts, then this could work for you. It’s well suited to uncomplicated businesses e.g. small high-street retailers.

For the turnover valuation you’ll need to²:

1. Work out the average weekly sales - take your total turnover within the current financial period. Then if you have it, add this to the turnover for the last financial period. Divide this sum by the total number of weeks in both periods. (Don’t forget to exclude VAT from your calculation).

2. Find your weekly multiple - this is a percentage of the annual revenue which equates to a fair value of turnover and this varies according to your sector. So, for cafes it’s usually about 20 weeks and for hairdressers and beauty salons between 10 and 15 weeks.

3. Multiply the sector value by the average weekly sales figure.

The complete formula is (turnover / number of weeks) x sector multiple = business valuation.

5. Valuation based on Price to Earnings (P/E) ratio

If your business is well established and its profits tracked, you could use the P/E ratio, which is also known as multiples of profit.

To do this, follow these steps³:

1. Work out the P/E ratio - divide the current share price by earnings per share (EPS). You can find out these figures and plug them into the calculation. Or, estimate the P/E based on the average figure of between 4 and 10². (Businesses with high forecast growth or a good record of repeat earnings are more likely to be at the higher end of this average).

2. Once you have your P/E ratio, you can then do a simple multiplication to work out a valuation. You multiply your post-tax profits for the year, by your P/E ratio.

How to decide which value to use

As businesses differ on many factors such as size, age, profitability and public perception or perceived value, there isn’t really a simple answer to this question.

What could be useful though is trying out a few of the above ways of valuing a business and see what figures you get. Ask yourself if you think they represent what your business offers.

And remember to look at what comparable businesses have sold for. You should also be taking into account intangible assets such as staff expertise and customer satisfaction.

Save money when you buy or sell a business

If you’re looking to buy or sell a business overseas, you’ll need a payment solution to reduce your overall international transfer costs as these kinds of transactions can be quite expensive using traditional banks.

To reduce the costs, open an account with Wise and you can send money overseas for tiny fees and currency conversion at the real market rate with no mark-up. And if you end up selling your business to an overseas buyer, you can receive the funds without the high recipient fees charged by many banks.

You could also benefit from sharing local account details from Wise. With these, you’ll be able to receive money in the local currency and convert it later yourself using Wise’s far better exchange rate.

Start saving today with Wise

Hopefully, this guide has proved a useful place to start when it comes to valuing your business.

Remember to take into account the type of business you own, and try out a few different valuations before you settle on a final figure. If in doubt, it could be helpful to seek an objective professional valuation. Good luck!

Sources used for this article:

  1. Law donut blog post.
  2. uscita blog post
  3. simply business blog post

Sources checked on 28-April-2021.

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