Valuing a business is extremely difficult, whether it is your own or someone else’s. Like beauty, value is often in the eye of the beholder – the seller of a business will almost always have a very different view of a company’s value than a prospective buyer.
The best tip for valuing a business is to get help from an accountant, a lawyer and/or a valuation expert. They will hopefully have experience in business valuations, and will be able to guide you through any negotiating process.
The valuation of a business may be based on the profit it is making, the quality of its customer base or contracts, the strength of its cashflow, the value of its brand or the value of its assets – or, as is more likely a combination of all of these factors.
Typically, industry-specific “rules of thumb” will help guide any valuation. For instance, an accounting firm may be valued a one times annual income from fees, while a manufacturing business may be valued at five to 10 times annual profit before tax. An understanding of these rules will be extremely helpful.
Finally, don’t be afraid to ask the entrepreneur selling the business to explain to logic behind the asking price. If nothing else, this could help provide a starting point for negotiations.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
