You need to determine what the asking price will be for your business and what your minimum price is.
There are several ways to find out a fair asking price for your business. Some common methods of working out the value of a business are below. This list is not exhaustive and keep in mind that there is no one set method. A combination of methods can be used to arrive at your desired sale value. You may also need to negotiate the method of valuation with the buyer or the financier
1. Look at current marketplace value and your industry
How you value your business can depend heavily on the industry you’re in, and the current marketplace value of similar businesses within that industry.
Industries usually come up with their own rules and formulas to value a business, so it’s a good idea to conduct research to gain a good understanding of your industry before you sell your business.
The Australian Bureau of Statistics is often a good source which contains a range of statistical data grouped by industry.
2. Use the return on investment (ROI) method to calculate value
The (ROI) method uses your business’ net profit to work out the value of your business. To get your ROI, divide the net profit (before owner’s salary) by the selling price:
ROI = (net annual profit/ selling price) x 100
For example, you have a selling price of $200 000 in mind, but want to test your ROI based on that price. You calculate that your business’ net profit was $50 000 for the past year.
To work out the ROI, you use the formula:
ROI = (50 000/200 000) x 100
In this case, your ROI is 25%.
If you have an ROI in mind, you can use it to calculate the price for your business:
Selling price = (net annual profit / ROI) x 100
For example, if you were looking for a ROI of at least 50% for the sale of your business, and your business’ net profit for the past year was $100 000, you can work out the minimum selling price you should set.
Selling price = (100 000/50) x 100
In this case, to achieve a ROI of at least 50%, you’ll need to sell your business for at least $200 000.
3. Use your business’ assets to calculate a fair value
Calculating your business’ asset value includes both tangible and intangible assets of your business. Tangible (physical things you can touch such as tools, equipment, and property (if you are not leasing). Intangible assets are things that can’t be touched but are still valuable such as intellectual property, brands and business goodwill.
After you’ve calculated the total asset value of your business, you can then use this value as an indication for how much you would like to sell your business for.
Remember to take depreciation into account. Depreciation is the loss of value for your assets over time. For example, you may have purchased a piece of equipment for your business three years ago for $1000. When calculating your business’ asset value, the value of the computer will no longer be $1000 as it was when you purchased it.
Your accountant can often be a good source, as your business would have an assets register with details depreciation values.
Is business goodwill an asset?
Business goodwill is an asset but is much harder to value, as it does not have a determined market price. Goodwill can include:
- customer loyalty and relations
- brand recognition
- staff performance
- customer lists
- reputation of your business
- Business operation procedures.
Calculating goodwill can be a complicated process, and different methods will give different results. Using different methods of calculation can give you an indication of the price range you would like to set for your business goodwill, and ultimately the value is what the marketplace or buyer is willing to pay.
Because it’s difficult to calculate goodwill, it’s a good idea consult a professional such as your accountant.
4. I started my business from scratch – what is its value?
The cost of creating your business from scratch can be used as a benchmark for valuing your business. This is the estimated cost to build a similar business in your industry from scratch within the current market. To calculate the cost, you’ll need to include all costs related to starting from scratch, including the costs of:
- buying stock
- buying equipment and tools
- getting licenses and permits
- recruiting, training and employing staff
- developing products
- marketing and promotion
- buying or leasing premises
- Setting up an online presence (website, social media) etc.
E. Estimate the future profit of your business
For a buyer, the biggest value of your business will come from future profits generated. As a seller, you’re more likely to sell at a higher price if you can show through your financial statements that your business is likely to be profitable in the future.
This helps give a prospective buyer an idea of the returns they may expect from your business in the future.
You can estimate the future profit of your business by looking at any trends in your business finances from past years. You can also investigate the trends of similar businesses in your industry to see how your business compares and how the market is going. This information may be useful when negotiating the final selling price of your business.
You also need to be aware of the effect Goods and Services Tax may have. It is suggested that you check with your accountant as to whether GST should be inclusive, or exclusive or not applicable to your sale.
