How Do I Value My Business?

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How do I value my Business?

One the first steps to selling your business is to set a reasonable value for your business. Unfortunately, what you think your business may be worth, after your years of your blood, sweat and tears being poured into it, is not necessarily what someone else may be willing to pay for it.

A  business is primarily valued on the future “ability to earn” of the business and the annual net profit. How much profit will the business make, and against that, what are the risks involved. For example, there may be the potential for great profit, but if that goes hand in hand with huge risk, the value of the business for sale will be less than you may anticipate.

Things to think about when considering what price you would like for your business include:

  • What are the tangible assets of the business? Is there substantial plant and equipment that is worth a lot of money. Does the plant and equipment need repair, or will it need to be replaced in the near future? A simple asset valuation adds up the value of the assets minus the liabilities. However, the cost of items that are clearly worn or near replacing also need to be considered.
  • Is there substantial value in the intangible assets? Is there a great deal of goodwill with the business and a broad and loyal customer base? Is there a brand associated with the business that is well known and respected?
  • How long has your business been operating? The length of time your business has been established and run as a sound earner will impact on the price you can ask.

A common way to value a business is by using a price/earnings ratio and multiplying that by the most recent post-tax profits. However, care must be taken to determine which P/E ratio to use and whether other factors need to be considered.

We always advise that a potential seller should get their business valued by a qualified accountant or an experienced business broker with a realistic attitude.

To obtain legal advice regarding your business, contact MMLaw on (07) 5443 1800.

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Disclaimer

The content published in this Blog is in the form of academic papers and the opinions expressed herein are generalised. The information provided is for educational purposes, not specific legal advice.

The application of any principles referred to can alter from case to case and accordingly you should seek independent legal advice in respect of your individual circumstances.

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