How to value a business

Whether you're looking to sell your business, attract investment or make strategic decisions, knowing how much your business is worth puts you in a strong position.

Although there are lots of positives to knowing your business’s value, 98% of small business owners don't know it. So if you don’t know either, you’re in the majority. If you do want to learn how to value your business or explore whether you should enlist professional help, keep reading — this blog is for you!

How to value a company

There are several methods of valuing a business; here are four ways:

Market-based

For a market-based valuation to be worthwhile, there has to be good market data availability. For this valuation, you use metrics like recent sales or stock market data of competing companies in the same industry to help benchmark your company and understand its value.

Earnings-based

Either your current or projected earnings make up this kind of valuation. The valuation report focuses on your organisation’s ability to generate profit. The most common method to calculate an earnings-based valuation is to use the Price/Earnings ratio. This ratio helps you understand what investors will pay per unit of your company’s profit.

Asset-based

This valuation is the net worth of all your assets combined (tangible and intangible). To calculate this, subtract your liabilities from your total assets. You can use the book value, current market value or liquidation value of your assets.

Revenue-based

A quick way to calculate your business valuation is to multiply your annual revenue by an industry-specific multiplier. To find this number, search for industry reports or Google “revenue specific multiplier” and add your industry into the search query, e.g., “revenue specific multiplier for healthcare”.

Reasons to value your business

There are a few reasons you might consider getting a business valuation:

Looking to attract investment or secure funding

Before investing in your business, an investor needs to understand the financial risks your business poses. The same goes for business finance — lenders might want to know the business value to help them determine whether to lend to you.

Please note: not every type of business finance requires a business valuation.

Buyouts, selling and acquisitions

If you're hoping to buy out a partner, you're looking to sell the business, or it's part of an acquisition, you'll want to get your business valued. You’ll want to ensure a fair price when part of a buyout, a sale or an acquisition. Having a concrete value means clear communication and a smoother transaction.

For your insurance provider

In the same vein, insurance providers might benefit from knowing your business's value to more accurately provide cover should you need it. Insurance providers won’t always ask businesses to provide a valuation, but businesses with considerable physical assets, such as manufacturing equipment, for example, might be asked to provide a valuation to make sure they’re not over or under-insured.

To benchmark against competitors

Knowing what your business is worth can help you understand your place in the market and make strategic decisions based on your findings. For example, if you notice your company is of lower value than your competitors, you can use this to remodel your pricing strategies or start investing in innovation to push ahead of the competition.

Five things that affect business value

1. How profitable your business is

Profitability indicates a company’s ability to generate both cash and returns, which are very valuable to investors and buyers. The more profit you make and the better you manage your company finances, the less perceived risk and the more attractive your business is to invest in.

2. Condition of the market

An uncertain market can affect both the actual value of the business and its perceived value. It’s not just external risks affecting the business value; it’s also influenced by industry-specific trends. For instance, if there’s economic instability that negatively impacts consumer spending, your business’s value will likely decrease, same goes if you’re part of a declining market, such as game rentals or retail.

3. Growth potential

Investors want to know what the future holds for your company, which means forecasting growth potential is essential to an accurate valuation. They’ll want to understand what expansion plans look like or whether there are untapped markets to move into.

4. Tangible and intangible assets

Both intangible and tangible assets hold significant value for your company, particularly tangible assets like property and intangible assets like a recognised brand or technology. Assets can attract higher investments.

5. Customer base

If you have a loyal customer base, it means your business benefits from returning sales, which breeds stable and predictable revenue. You can measure customer acquisition cost (CAC) and customer lifetime value (CLV) to help you calculate just how profitable your customer base is.

Strategies to improve your business value

Increase profit margins

If your profit margins are thin, you can look to improve them by increasing your prices, driving down the cost to produce your products.

Continuously monitor the competition.

This helps you spot gaps in the market quickly and move to fill them, gaining a competitive advantage and improving your business value.

Streamline business operations

By embracing automation in your business processes and reducing manual data entry, you’re helping your workforce become more productive and efficient. This lets your team focus on more important tasks that drive business value.

Focus on building loyal customer relationships.

Brand loyalty is valuable to any business. Look to nurture loyal customers, implement a loyalty reward program, overhaul your customer journey and deliver exceptional customer service.

Should I get a professional valuation?

If you’re just curious about the value of your business, or you need to know for basic planning reasons, using online business valuation tools or industry benchmarks can be plenty.

But if you’re looking to attract investors or scale your business, you’ll need a credible business valuation, which means hiring a professional valuation expert.

Here's when you should consider a professional valuation:

• If you’re buying or selling a business
• Looking to raise capital
• If you’re getting divorced, are going through probate or a legal dispute
• Shareholder exits
• Management buyouts

With an expert, it’s not just a valuation you receive:

• They can identify liabilities so you can avoid costly mistakes
• They give you advice on increasing your business value to help you grow
• A valuation strengthens your position when negotiating a buyout, helping you cinch a better deal

Securing working capital

If you want to grow your business value without dipping into your cash reserves or personal funds, you can apply for a small business loan and spend it however you want to grow your business.

Our free business loan comparison tool is a quick and easy way to find and compare eligible loan products instantly, in your own time. Our self-serve platform allows you to access flexible and affordable business finance from the comfort of your own home or office.

You’re under no obligation to accept any loan offered to you, and getting a quote will not affect your credit score. Compare business finance.