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How much is your business worth?

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How much is your business worth?

By , January 15, 2018
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Thinking of selling a business? Do you know how much it is worth?

For many business owners, how to value a business remains a mystery, despite most having at least a rough idea of what their home is worth! Taking the time to create an accurate business valuation is not only informative in terms of retirement planning, but will also provide you with some key strategic drivers to increase the value of a business over time.

A business valuation is the result of two key factors: risk and reward. But within these there are many factors to consider, as not all risk and not all returns are created equal.

 

Evaluating risk in selling a business

The most obvious risk is “key-person risk”: how dependent is the business upon the owner/s? What about other key people within the business?

Is the business likely to be affected by disruption? Think of the industry changes to video stores and taxi cabs. Whether buying or selling a business, there are plenty of risks to consider: competitors, economic changes, employee, fraud or corruption, and OH&S, to name a few.

It’s important not to turn a blind eye here; identifying as many of these risks as possible will give you a more accurate idea when valuing a business. As with any investment, the higher the risk the lower the value, but this is certainly true of any privately held business.

Looking at rewards in valuing a business

Reward (or return) is also worthy of review. Firstly, reward equals profit. However, not all profits are equal because not all income is equal. A business with ongoing contracted income, which is therefore recurring and predictable, is far more valuable than a business which needs to make new sales to generate revenue.

The combination of risk and reward will drive the valuation multiple. When talking about listed companies this is often referred to as the price to earnings (PE) ratio. This ratio is the key value driver for unlisted companies as well, so it’s worth considering what can we do to drive this multiple higher and thus improve our valuation.

Beyond risk and reward, finding the right buyer is a way to maximise value when selling a business.

Get in touch with us if you want to know how much your business is worth.

 

Craig West

Craig West

Managing Director | Succession Plus

Craig West is a strategic accountant who has over 20 years’ experience advising business owners. His background as a CPA in public practice, provided invaluable experience in the key issues of concern to business owners. Following 6 years of study to gain two masters degrees, Craig focused on Capital Gains Tax (CGT) for business sales advising on strategic management of tax issues. This experience formed a very strong view that business owners (and often their advisers) were unprepared and unaware of the steps required to prepare a business for exit.

Craig now acts as a strategic mentor for mid-market business owners and has written four critically acclaimed books on employee incentives, succession planning, asset protection and exit strategies. Craig has conducted numerous seminars and keynote presentations throughout Australia & internationally, including adviser education programs for the Institute of Chartered Accountants and CPA Australia.