There is more to the value of a business than simply the balance sheet and the cost of the inventory on shelves.
If you are either buying a business or selling a business, there is a need for independent and expert valuations of your business and business brokers involved to ensure that everyone comes out on top.
When blood, sweat and tears have been put into a business, the business owner may put a price that is a great deal more than what the business is worth. Consequently, an owner may not be able to realise the actual potential in what the business is worth, undervaluing it and selling themselves short.
As such, here are three tips from the pros in understanding how to value a business.
Start with the balance sheet
Every business should start with the balance sheet. The performance of any company can be found in its financial statements and is vital in the valuation models of every business.
The two main areas for review of a business’s performance are that of the track record of the business (reported in its recent income statements) and its present financial condition (reported in its latest balance sheet).
The balance sheet is important as it allows business owners and potential owners to see the underlying assets – what the company owns – liabilities – what the company owes and the financial position of the company if you were to buy it today.
The balance sheet can show individuals and accountants how financially sound a business is and outlines to potential buyers the current value of the business.
Although you start with a balance sheet, there is much more to valuing a business.
Review the price of similar businesses
There are not many businesses in the world that have a monopoly, or in other words, have 100% of the market and have no competition. In Australia, we have one that most people know and use – national mail distributor Australia Post.
When you are looking to value a business, it is important to look at similar businesses for sale or that have recently sold to ensure that you are in the same ballpark. A business broker is usually your best bet here, as they have access to past sales, similar property sales not to mention industry data.
It is important that you review the difference in local foot traffic, online sales and product offerings to ensure you are comparing ‘apples with apples’, however it may provide you with insights that you are onto a great deal, or potentially paying too much for a business for sale.
Intellectual property can be a game changer
As the world moves towards being more digitised and service driven, intellectual property is an absolute game changer. From brand names, logos, websites, recipes, service offerings, if your intellectual property is for sale along with the business, and that IP has a value attached to it, your business just became a lot more expensive.
Often people without knowledge of the value of IP just give it away, while many people who are in the know will add way too much value. With this in mind, it is always important to have third-party experts reviewing your company’s intellectual property.
As the IP world continues to evolve and expand, the blurring of IP will increase, as such it is important for business owners to review if there is any potential value in your IP, trade secrets and operating model to ensure there are no unforeseen game changers..
Valuing a business requires more than an ‘idea on how much your business is worth’, legal, intellectual property, finance, marketing and goodwill factors should all be taken into consideration before you buy or sell a business.
Due diligence and agreed value between independent experts are most certainly required to establish the best outcome for both buyer and seller. It needs to be remembered that the value of something is the price people are willing to pay. If you are not willing to pay the valued price, then you need to walk away, otherwise, the investment may not be a positive one.
Author: Hayley Clark
Hayley Clark is a content writer born and bred in New Zealand. She has been writing, editing, and working in the industry for over five years, for a myriad of companies, including Virgin Money, Thrifty, Destination New South Wales and Michael Page.