Eliot Hibbert from the Martin-Kaye Corporate Commercial Team said in reality, a business was only worth what someone was willing to pay for it.
“Many small business owners grow attached to their business as they’ve put in so much hard work to develop it – but this can lead to them valuing their companies at a higher level than is sensible. Anyone seriously considering selling their business will need to have realistic expectations about its value before they even think about selling.”
Eliot said there was no single formula that could be used to precisely value every private business – sellers would want to drive the price up and potential buyers would want the opposite.
“Although there are relatively easy ways to value certain parts of the business – such as stock; assets like land, machinery and equipment – there will also be elements of the business that are much more difficult to put a price on.
“These intangible elements include goodwill such as trademarks, branding, key people, the size and quality of the customer base, and the reputation of the company, which are notoriously difficult to value. In many cases, it will come down to how keen a potential buyer is to acquire your business.”
When looking at the overall value of a business, there are a number of different valuation methods that are commonly used from using earnings multiples, to calculating how much it would cost to create a similar business.
“There are outside factors to consider too such as the economic climate as clearly a buyer may be more cautious when buying a business during an economic downturn.
“And on the other hand, when times are good, more companies tend to want to grow by buying other firms and finance is more freely available to help them achieve their aims.
“With more potential buyers in the market, you’re more likely to get a higher price when the economy is booming. So entrepreneurs who are serious about selling their business need to think carefully about the timing and the honesty of the value they’ve put on their company before they take the plunge.”