Good question! The answer is "it depends" - and it depends on a lot of variables ...
Stripping the question back to basics… what you are really asking is what value would I, as seller, agree to sell the business for and what value would a third-party buyer agree to buy the business for? If the seller and buyer agree then that is your business value. This is sometimes referred to as the “fair value” of your business.
A business valuation is not a scientific exercise, with a complicated mathematical formula to apply to give you an “answer”. It is a very judgemental exercise and ultimately the value attributed to a business would only be “correct” if it was one that a willing seller and a willing buyer would agree to exchange on.
As you can appreciate a seller would typically value a business High and a buyer would value it Low. A deal would only take place if both parties are able to negotiate and compromise and agree on a value somewhere in between the two extremes. This is why an independent expert is often brought in to value a business – appointed by one side of the negotiation or jointly appointed.
So, getting back to the question – what is YOUR business worth…
If you are asking that question with a view, now or in the future, to exiting your business then the first thing you need to think about is to structure your business so that it looks attractive to a buyer.
We look at many businesses which are great little businesses that are generating a very nice living for the owner manager. However, the most common pitfall of businesses structured like this is that the true value of the business itself is not in the brand name or the bricks and mortar but in the person running it. We find that the owner manager is doing the lion’s share of the work, has a wealth of knowledge and has the key relationships with customers. What if that owner is removed from the business? There is nothing left and hence no value to a buyer. In this instance the “profitable” business may well be worth nothing to an outside buyer.
If the business has employees then the owner needs to start sharing and spreading the knowledge they have acquired over time and they need to introduce key employees to customers. Over time the owner can gradually take a back seat, leaving employees to do most of the client facing activities. This would then look attractive to a buyer as, in theory, the business customers may not even spot a change in ownership.
If the business has no employees then that is more of a challenge. The owner needs to work on building the brand name and image so that the brand starts to develop a value in itself. The owner should still expect to have to agree to some sort of phased transaction with a buyer to give the incoming owner the ability to meet customers with the outgoing owner and to form relationships therewith before the original owner retires completely.
The second consideration is to make your business look attractive to a buyer by a strong track record showing that the business is on a growth curve. A buyer is essentially placing a value on your business based on the future earnings potential that the business is predicted to generate. Historic results are a good indication, together with budgets and forecasts. Easy in theory, hard in practice but a business on a growth curve will command a higher value than an equivalent business that is “treading water”.
Lots of other variables will impact on a business value. These include the existence of sales contracts, supply agreements, a nice spread of customers with none that are individually significant, operating in a sector that is predicted to grow, niche products, trade marks etc etc
Lots to think about but if you are thinking of selling your business in the future then you would be advised to consider the structure and track record points above as a matter or priority.