Value a Business

How are businesses valued?

Accountants often apply all sorts of complicated and often baffling formulae to value a business. However, unless they are an expert in the sector and have sufficient genuine experience of clients who have sold recently, this can often be misleading.

In practical terms and whichever way you dress it up, the reality is that the price you achieve when you sell a business is the price someone else is prepared to pay. In other words the true value of a business is purely subjective to the buyer.

Most businesses are ‘valued’ primarily on multiples of true net profit - sometime referred to as YP, with the specific multiple of profit dependent upon:

  • The level of supply and demand in the particular business sector and location
  • The quality, quantity and age of the fixtures, fittings and equipment or plant and machinery (e.g. a business with the same annual profit levels as another, but where core equipment or machinery is old and will need replacing much more quickly is obviously likely to attract a lower price in reflection of this.)
  • Perceived potential – i.e. a business which is being run in a streamlined and optimised fashion is likely to achieve a lower price than one with the same profits where it is perceived the business could be run better to achieve an even better return.

A growing trend we are witnessing (particularly in rural and suburban locations) is that of lifestyle orientated purchases. These are situations where the motivation of the buyer and the price paid they are prepared to pay is more about achieving an improved work/life balance than the underlying profits of the business. In many such cases the business will achieve a higher selling price than a ‘technical’ valuation would indicate. Obviously this phenomenon is location specific.

The First City Approach

Whilst we always seek the best possible price for our clients, in discussing marketing prices with clients we always provide honest figures which we believe are achievable. This means that we never:

  • Suggest an inflated price to secure the business
  • Suggest an artificially low price to secure a quick easy sale

If required we can recommend suitable suppliers for technical valuations as sometime required by lenders for funding assessment purposes.

To discuss the value of your business, please complete our Valuation Enquiry Form.