Realising the value of your business is critical in assessing the financial health and selling potential of your business. It is essential to enter into the valuation process with your emotions under control especially if this is your first company or a family-owned business as subjective opinions will affect the objective task at hand.

Here is a list of things to consider when trying to value your business.

1. Get your financial information in order

Before you start approaching the topic on how to value your business before thinking of selling, you need to organise your financial records as these play a crucial role in providing accurate calculations. Financial information is also mandatory in transferring business ownership, so you’re essentially killing two birds with one stone.

Sellers are required to have the following documentation to ensure an accurate valuation:

• Licences, deeds and other proprietary documents

• Profit & Loss statements

• Tax returns and filings

• Overview of the business or personal finances

2. List your business assets

One way of helping identify the value of your business is to list down the assets your company owns. This may include production, property and resources such as cash and investments, assets and liabilities, employees and intellectual property rights. An ideal way to make the list is by arranging it according to tangible and intangible assets.

3. Outline the business model

Having a solid business model demonstrates how your business makes money. It helps buyers understand the potential of your business based on the service or product range and actual customer reach to generate revenue.

It may be useful to include your business plan as an aid to make accurate growth and earnings projections. A strong business plan can demonstrate to buyers the effectiveness of your strategy to turn a profit.

4. Familiarise with your industry

A thorough understanding of your industry gives you the advantage of identifying industry trends which helps in the valuation process by reflecting your business assets based on the current market.

Once you are confident with the above aspects of your business, the most accurate way of valuing your business is by making fact-based earnings projections. It is critical to do so objectively by focusing on your business’ assets and liabilities.

Income approach

There are two ways of determining the future income your business can be expected to generate.

• Discounted cash flow. This method assesses the current value of your business’ future cash flow and adjusts it based on the purchasing risk. This is an ideal approach for younger businesses with high-growth potential that aren’t currently profitable.

• Capitalisation of earnings. This method calculates future profitability by taking into account the cash flow of a business, the annual return on investment and the expected value. Unlike the discounted cash flow approach of future risk assessment, the capitalisation of earnings method assumes that fixed period calculations will continue in the future. Naturally, this works best for established businesses with stable profitability.

Asset approach

This method focuses solely on the assets of a business and requires a list of the business’ assets with an assigned monetary value to each. The value of depreciating assets is adjusted between the sale price and the depreciated value. There usually is a need to do some market research to understand the current market value of assets to price them accordingly. This approach is ideal for businesses that function mostly in investments such as shares, stocks, bonds, real estate, etc. or for those that seek to liquidate.

Market approach

As the market approach involves determining the value of a business by way of making comparisons with similar companies in the same industry, you will need to have a comparable competitor based on purchases and sales. This method is useful for businesses that experience rapid growth.

The process of determining a business’ value is complicated as can be seen above and you may wish to consider consulting a professional business advisor or accountant specialised in valuations.