So many business owners have no idea what their business is worth. Arriving at the true market value of a business involves a full assessment of all aspects of the business. Although the net profit is the main determining factor, other important aspects have to be considered, such as the lease terms of the business premises, the degree of risk, the tangible assets, the strength of the client base, the competition, the staff, the skills needed to run the business, the potential to grow the business, plus many other minor factors. The ‘goodwill’ of a business is defined as the sustainable future profitability of the business, if ownership changes. There is no universally accepted method of valuing small to medium (SMEs) sized, privately owned businesses. If you ask 10 different business valuers or accountants to value your business, you’ll probably get 10 different values.
Essentially, the value of a business is what a ready, willing and able buyer can be persuaded to pay for the business, in an ‘arm’s length’ transaction. Boil that statement down to reality and it means that one buyer may see value at the stated price and another may not, depending on their own perception of value, relating to your specific business.
Past sales of similar businesses are the most appropriate method of determining values of businesses. The market today could be different to last year; market conditions change, so recent sales evidence is important. There are numerous methods used to value a business, such as Return on Investment (ROI), Capitalisation Method, Goodwill Method, Discounted Cash Flow Method, Cost to Create Approach, Net and Tangible Asset Method. So, the value of a business is what a buyer will pay for it, today.
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