Business Valuation Calculators
There are many online business valuation calculators out there, do they work and what do they do? Well, that’s what we’re going to be discussing this month. As always you can find more of our articles here. You can also subscribe to our newsletter to receive monthly updates on our businesses for sale and articles.
If you type “business valuation” into google the first few pages will be full of business valuation calculators or something similar. These calculators will ask around 6-8 basic questions such as the sector, turnover, net profit and projected figures of your business. The calculator will then produce a range of potential values that represent your businesses worth. There is always a section for contact details which then, inevitably, lead to a call or email from an agent. They will likely offer their services to put your business on the market. Then they will ask for more details on the property because they can’t provide an accurate valuation with the information given through the calculator.
How business valuation should be done
Profitable businesses are generally valued on an income approach and the skill of the valuer is essential in getting to a level of turnover and profit that reflects the current business, not necessarily the last set of accounts. This takes all costs and revenue that are personal to the current owner out of the equation. It then assesses the net profit of the business if run by an average, competent operator.
The best method following this process is to value the trading business by using a multiplier of the adjusted net profit (more about that here). The multiplier reflects the current market and should reflect recent sales of similar businesses; however, this information is often hidden or confidential. The valuer therefore needs to use experience and common sense when adopting the multiplier. We have also discussed how to find the correct multiplier.
Most businesses will be within the 2-5 times net profit bracket for valuation purposes. So for a business with an adjusted net profit of £95,000 the range would be from £190,000 – £475,000. The free valuation calculators would all result in a value at the higher range of this in order to attract business owners to put the business on the market with that particular agent. However, at this higher than market value the business would not sell. The agent would have to go through a number of price reduction exercises to eventually bring the value down to a market level.
This is a waste of everyone’s time and money.
It is better to get the company valued by a professional in the first instance. Then you can approach the business agents with a more knowledgeable and fact-based expectation of the value of your business. A professional valuer will also be able to provide advice and support throughout the process as well.
So all in all business valuation calculators provide a basic, likely inaccurate projection of your business value. They don’t really work when finding a realistic value for your business. Because they use a limited amount of information, a business valuation calculator is an educated guess at best.
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