If you are planning to sell your business, you need to have an idea of its value. So … how do you determine what your business is worth?
To sell your business you will need relevant documentation including comprehensive financials and revenue forecasts, as well as a list of the tangible assets that the business owns such as stock, equipment, furniture, vehicles, etc. You should also list any other non-tangible assets e.g. intellectual property (IP), client or member data bases, supplier contracts, loyalty programs, websites. A potential buyer will need to see any relevant legal documents such as leases, permits, registrations etc.
If you need assistance, you should contact your accountant or a business valuation specialist, but here are some of the ways to calculate the value of your business.
- Asset Value – add up all the business’s assets (allowing for depreciation) and deduct any debts or liabilities.
- Discounted cash flow analysis – take the annual cash flow of the business, project it into the future and then discount the value of the future cash flow to today, using a net present value calculation.
- Market value – to determine the market value of your business, you will need to consider the industry you are in as well as the level of your sales; the prevailing economic conditions; your location and what a similar business in your industry may be worth. You can find industry data from the ABS to help you.
- Return on Investment (ROI) – you can either use your business’s net profit to work out its value, either based on a selling price that you have in mind (ROI = (net annual profit/selling price) x 100) or a selling price based on a ROI that you determine (Selling price = (net annual profit/ROI) x 100).
- Entry Cost Valuation – this is based on how much it would cost to start the business from scratch. Set up costs could include equipment, stock, furniture, marketing, domain names, etc.
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