What’s your business worth?

What’s my business worth?

That is a question that many business owners ask themselves and their advisors. Aside from the fact that business owners like to feel they are creating an asset that will have some sale value when they decide they want to move on, there are any number of reasons that the question of business value may arise such as:

* Investors wanting to take a stake in the business
* Staff members being rewarded with equity
* New partners being introduced
* Merger with another business
* Acquisition by a competitor
* Straight trade sale
* Tax purposes (e.g. selling shares in your company over to a family trust)
* Curiosity!

As you can see, there are a variety of reasons that a business owner may have for wanting to know the value of their business.

Now that you’ve established the why, the next question is to establish how one goes about putting a price on a business. This will, ultimately, depend upon your reason for getting the valuation done in the first instance. If you need a valuation for tax purposes (e.g. due to the market-value substitution rules that come into play when related parties carry out a transaction, or for the employee share scheme provisions) then it needs to comply with what the ATO would expect to see if they investigate. The general rule of thumb here is the longer the report the more likely it’ll stick. For this reason you should get a full-form valuation carried out by a suitably qualified accountant. See here for more information on that.

What if you don’t need a full form valuation done? In our experience, this will typically be the case when you’re looking for a starting point for negotiations when you’re being acquired or merging with a competitor – in both these cases the market will decide the value following on from robust negotiations, but a calculation that provides an estimate of value will supply a handy jumping off point.

Setting aside sale and mergers and whatnot, you may simply be curious as to the value of your business. Business owners often put their blood, sweat and tears into their ventures and it’s nice to know that the effort has been worth it!

A simple, affordable and informative solution …

With this in mind we’ve developed our Market Value Estimate tool that allows us to quickly (and affordably) provide an estimate of the market value of your business. In our experience it has proven to be a fantastic tool to start negotiations when clients have been buying or merging their businesses and have wanted a rough idea of where to start things off. It’s also been very useful for clients to track the progress of their business over the years, helping to ensure it is increasing in value. The tool doesn’t pretend to be a full-form valuation that complies with the valuation accounting standards, but often you don’t actually need that and to go to the expense would be overkill and it is in these situations our Market Value Estimate tool really shines.

Written by Ben Fletcher, managing director at Generate. A version of this article was originally posted on their Better Business blog.