01 Nov How much is your business worth?
Our advice on how much is your business worth?
The answer to how much is your business worth is not straightforward but the aim of this series of blogs is to allow you to understand this process clearly. However, this blog does not show all of the complexities of assessing a business’s worth. The accurate way to value your business is not a % of turnover. This does not reflect the profitability or the individual nature of your business. More importantly it does not reflect the way potential buyers behave in assessing your business. The only way to value a business with accuracy is using a multiplier of the adjusted net profit.
A company set up in 2011 selling discounted Apple products including IPads at a price unrivalled by other stores. Turnover in 2013 was £1,000,000 and the company made a profit of £50,000. Using the turnover method and using a widely used percentage of between 75% and 125% of turnover. This gives us values between £750,000 and £1,250,000 for the company’s worth. The best method to value any trading business is by using a multiplier of the adjusted net profit. For example giving an alternative valuation of Net Profit £50,000 multiplier 3, value £150,000. Even with limited information available I think you would agree this is more reflective of the low margins of the business.
The same company used a slightly different business model and worked hard at maintaining high profit margins and a longer term view on sales. This company’s turnover in 2013 was £650,000 but with a net profit of £120,000. Despite lower sales using the same multiplier on the net profit of £650,000 the value would be £360,000 reflecting the higher profitability of the business.
Next month: How do we arrive at the correct multiplier to use?
If you want our monthly blogs delivered to your inbox please contact us