How to Value A Business

If you own a business, you understand that many things, such as time, effort and resources (read money), go into building a successful firm. So, if several years into building your company, you decide to sell it or merge with another business to form one big firm, how do you quantify all these factors to know how much your venture is worth throughout its existence?

It can be challenging for most entrepreneurs to objectively asses the worth of their companies. However, valuing a firm shouldn’t be too hard. Depending on the type of firm, there are several methods to value a business.

In this article, we’ll discuss business valuation, its importance, the factors influencing it, and most importantly, how to value a business.

Let’s get started.

What is a business valuation?

Business valuation is the process of determining how much your company or business is worth. It is a multi-discipline skill that determines if you will sell, buy or reinvest in your business.

Undervaluing the business can lead to losses while overvaluing can result in losing the next investment funding, as seen in the Dragon’s den.

Let’s understand why business valuation plays a vital role in the business’s continuity.

Why value a business

Conducting a company valuation will help you know your company’s market value. Determining the value of a business is crucial if you’re considering to;

a.      Buy or sell a business

A business’s worth is the total value of assets, including equipment and inventory, fewer liabilities. When you want to sell or buy a business, conducting a valuation can help you with several things, including;

  • Deciding the right time to buy or sell your business
  • Improving or bargaining its perceived value
  • Closing a deal quickly, whether selling or buying

The company’s perceived value influences the willingness to buy or sell a business. It is crucial to conduct a valuation accurately to arrive at a sensible value and improve the chances of closing a deal.

b.     Improve your management strategy

A business is judged by how it’s run. Valuing your business can help you make informed decisions that streamline your business processes. Some critical decisions to be made upon valuation include;

  • Areas to be improved to deliver quality service and goods
  • Measuring the performance of your management team. This can help in offering incentives or changing roles in your management team.

c.      To secure investments

Successfully securing investment funding is vital for any business’s long-term sustainability. But going into the Dragon’s Den to secure financing for your company can be a making or breaking point, especially for small businesses.

It demands that you have your business’s projections at your fingertips, which should resonate with the company’s performance. Otherwise, you might flop. The good thing is that valuing your business can help you with exactly that!

Another way to internally secure investment funds is through buying and selling the company’s shares and issuing new share prices. All these factors significantly rely on the current valuation of the company.

What affects business valuations?

Some of the underlying factors that affect business valuation are;

1.      The age of the company

The age of the company can showcase its stability. A more established company has a positive asset column hence a higher valuation.

On the other hand, a relatively new business may have a negative asset value because of the challenges affecting setting up a profitable company. This impacts the valuation negatively, though it has the possibility of breaking even in the future.

2.      What is the circumstance of the valuation

Why you want to sell or buy a business can result in you under-buying or over-selling the firm. To leverage this to your advantage, consider if;

  • It is a forced sell- This usually happens if the business owner is either old or sick and needs resources for retirement or treatment. In this circumstance, the company is generally undervalued as it can accept the first deal it gets.
  • The seller is winding down the business- In this regard, you might want to consider the assets present less the liabilities to arrive at a reasonable valuation.

3.      How tangible are the assets?

During valuation, the future profitability of assets such as machinery, lands, and properties is considered.

As for businesses that have intangible assets, you can use the below principles to come up with a sensible company valuation.

How to value a business

The principles used to value a company are many. The following are some ways to consider when you want to value a business;

a.      Asset valuation

If a business has tangible assets such as buildings and land, it is crucial to factor them into your valuation. Industries involved in the manufacturing sector also fall into this asset class.

To know the value of such industries, determining the Net Book Value (NBV) from the accounts provides a clearer picture. It highlights all the assets registered to the company minus the liabilities. Remember to account for inflation, depreciation, appreciation, and collected debt when conducting asset valuation.

Also, intangible assets such as intellectual property, customer satisfaction, staff experience, and brand recognition can influence the value of your business.

b.     Entry cost

This valuation model is arrived at by considering the number of resources it would require you to grow the company to where it is today. You must calculate the production costs from the start of the business to the delivery of goods or services to consumers.

To negotiate for a better deal, highlight factors that limit the business growth, such as the location of the company and alternative sources of raw materials. Such factors play a critical role in reaching a more agreeable valuation.

c.      Price to Earnings ratio (PE)

Also known as multiples of profit, this valuation criterion is used for profitable businesses. The PE is arrived at by dividing the company’s stock price by its Earnings per Share (EPS).

A company with a high PE ratio may indicate that it is either;

  • Overvalued
  • Expecting high profitability growth in the future, or
  • Has consistent earnings from sales

Such companies include hot-tech startups and quoted companies.

Always recalculate the accounts using your accounting policies to get a clear picture of the company’s profits.

d.     Discounted cash flow

Discounted cash flow is a complex method of valuing a company. It is used for mature companies with continuous, predictable cash flow, such as utility companies.

Discounted cash flow works by predicting future cash flows today. The valuation is arrived at by cumulating the dividends of the forecasted ten or so years plus a residual value at the end of the forecasted years.

The risk and time value of money are calculated in today’s cash flow forecast using a discount rate of 15% to 25%. It is based on the fact that cash today is much more valuable than future cash.

e.      How to use turnover for valuation

Turnover is based on the net sales made in a particular period. It shouldn’t be mistaken for profit. Instead, turnover showcases how well your company is doing and the urgency, convenience, and popularity of your products or services.

Turnover is used alongside gross and net profit to place a reasonable value on your business. It can offer a clear picture of the company and streamline your business’s operational costs to increase profits, thus fetching a higher value.

Wrapping up

Valuing a business can be a daunting experience; however, with the above criteria, you can arrive at a sensible valuation.

Depending on your business, you can try different valuation methods. I hope this blog has showcased the best way you can come up with the actual valuation price of your company.

Business 83Business 83
21:16 16 May 24
Very easy sign up, clear and fast communication with competitive pricing. Just joined and hoping the service is as good as the sign up process.
Muhammad ADMuhammad AD
09:29 16 May 24
Great service, great rates and quick admin staff replying to emails and sending through stuff very quickly. 10/10 would recommend if looking for a virtual address in Glasgow for business or private company purposes.
Morag WebsterMorag Webster
07:39 03 May 24
I recently signed up to Clyde Offices and so far I couldn't be happier with the experience. From the moment I initially enquired about their services to signing up, their communication has been prompt and efficient. The sign-up process was incredibly easy and straightforward.
Calum PatersonCalum Paterson
06:16 03 May 24
Recently joined Clyde Offices and the whole process has been so easy. From signing up to the initial engagement from the team, the whole process couldn't have been better. would highly recommend.
SA PietrzakSA Pietrzak
16:05 24 Apr 24
I would like to recommend Clyde Office for friendly and professional service. The set up process was easy and straightforward.
Tom McDonaldTom McDonald
19:25 18 Apr 24
Great Service and very easy to use.
Teresa RTeresa R
13:43 18 Apr 24
Only recently joined, however, I am really pleased with the ease of joining, the promptness of engagement and the general engagement received. Thank you.
08:00 12 Apr 24
Setting up a new registered address for my business was so stressful with all the other challenges a new business faces. Clyde Offices took all the stress out of it. The service was so simple to use and we're very happy with the ongoing relationship.
Y. R.Y. R.
10:13 11 Apr 24
The registration with Clyde Offices was easy and efficient and the fee was very reasonable. I've been with them for a few weeks now and have been very happy with the service. Responses to a couple of queries I had were prompt and resolved easily. I would happily recommend this service.
esther iesther i
11:45 28 Mar 24
Really happy with the service so far very proactive and happy to help us with whatever we need
10:56 28 Mar 24
I am totally enjoying the services. This is one of my best decisions I made beginning of 2024.
Eryk SzyminiakEryk Szyminiak
11:02 26 Mar 24
I recommend it, easy access to the website and unrivaled low cost... '
Kerry HarveyKerry Harvey
12:22 21 Mar 24
Not long started using this s service and so far amazing. Easy set up and very fast.
Ian HoughtonIan Houghton
12:37 11 Mar 24
Excellent service. Centrally located Well priced
a ea e
09:40 04 Mar 24
Speedy on-boarding process, efficient mail notifications and friendly reception
19:43 15 Feb 24
Very fast service , address sent via email immediately after purchase. Attentive staff and customer service
Tom GairTom Gair
09:39 09 Feb 24
Found these guys, easy to follow online instructions. Quick to set up. Very fast response times to welcome us on board. Not yet used their services, but I'm sure they will be great!
Jordan SmithJordan Smith
13:49 01 Feb 24
Mark MunroMark Munro
14:50 29 Jan 24
Quick and easy to set up, very competitively priced with good support and friendly follow-ups.
Team NeonTeam Neon
09:40 26 Jan 24
Great service!
Michelle LydenMichelle Lyden
16:59 25 Jan 24
Clyde Offices provided us with a consistent and really good service for almost 4 years. Gerry was always at the end of the phone to help us with our queries. I would recommend Clyde Offices if you are looking to add value to your office needs, i.e. outsources answering service etc.
David HeriotDavid Heriot
11:08 11 Jan 24
Super easy to set up, very competitively priced and friendly follow-ups.
Gillian's WalksGillian's Walks
14:01 30 Dec 23
Quick and easy to set up. Great to have an option like this locally.
12:41 07 Dec 23
I was looking for a mailbox provider as I am studying and I live abroad. I found Clyde Offices and they were very helpful in answering my questions. Very reasonably priced and would allow me to receive a few parcels. I highly recommend them and I will be using them for many years. The staff were very attentive and friendly.
Julie MurphyJulie Murphy
15:16 06 Nov 23
This is a great idea if you have your own business but would like an address in the city centre on top of, or instead of your own address or other location.Allows you to advertise as being based in the city centre.Anytime I had to contact the offices the staff were great and very helpful. I didn't need to contact them much at all because the process is so easy and straightforward.
Charles RidleyCharles Ridley
08:55 20 Oct 23
Really easy to get set up and competitively priced service.
William KimmetWilliam Kimmet
23:25 19 Oct 23
Very good and very cheap rental
Jon ChristieJon Christie
11:25 10 Oct 23
Can't fault the service; long may it continue. A good choice for most I would think
Stacy MairStacy Mair
09:56 10 Oct 23
Clyde Offices were very helpful and informative when setting up an account with them, they provide the full service at competitive prices and no additional fees.
j caldwellj caldwell
16:47 21 Aug 23
Setting up my virtual business address with Clyde Offices was so quick and easy to set up in minutes. They also were in email contact to make sure everything was ok and if I needed any other services from them just to make contact with them. I couldn't be happier with the service I received. Thank you
Levati LearningLevati Learning
14:13 21 Aug 23
Very good experience working with the team at Clyde Offices. They have been helping us out for over 5 years now and couldn't survive without them.
Joanna “C.”Joanna “C.”
16:12 14 Sep 22
A vastly superior service from Clyde Offices than any of the corporate virtual offices I have used in the past. A fab team, very efficient and friendly, always very helpful. I would recommend them one hundred percent. Great Central Glasgow location if you ever need to visit.
Audrey JenkinsAudrey Jenkins
04:00 03 Jul 22
I hired a mailing address through Clyde Offices for two months and the service was hugely helpful during that time. I rented some camping equipment for my hiking trip and could only find it for mail delivery; because I flew in from the USA, I needed an address in Glasgow and it so happens their office is very near the train station so this plan worked out perfectly as I set out Monday morning for my trip via train. In addition to easy communications and set up, the service worked with me on my order so that delivery time and pick up were arranged and I had no issues arriving and picking up as planned despite an awkward delay between delivery and pick up. My box was also large, which was certainly an inconvenience for them to hold for a week, but they understood my situation. I recommend Clyde Offices if you are seeking a mailing address in Glasgow.
Kathleen RobertsonKathleen Robertson
09:33 21 Mar 22
I have found Clyde Office to be 100% committed to all work that they carry out for people. Very helpful polite and trustworthy.
Ralph FlemingRalph Fleming
14:44 20 Mar 22
Alan and the team have been a real find for me. They do my reports and deal with all my mail for me. They automatically scan my mail over to me so that I can pick it up on the go, I could not recommend them enough for a small business like me. It's true what they say if you don't have an admin person then you are the admin person!
Austin PowellAustin Powell
17:56 19 Mar 22
Clyde Offices provide me with an incredible service that is invaluable. They help me manage my business. I use for call answering, mailing address and also they help with some of my admin via the virtual assistant service. 5 stars for sure.
Hunter StellaHunter Stella
18:45 16 Mar 22
Sign up was straightforward, and got a virtual mailing address confirmed within minutes. Would recommend.
Glasgow ClinicGlasgow Clinic
11:57 16 Mar 22
Amazing service for a new startup. Understands my business needs and always happy to offer solutions. Professional staff at the end of the phone every time.
hondo madhohondo madho
15:19 14 Mar 22
The staff are professional and timeous in their communication to customers.They give you confidence to work anywhere in the world and they handle your administration in a fantastic way.....keep it up...