You’ve put hard work and money into your business, but how do you know if it’s paid off? There are multiple indicators of success, but one option is to check your business rate valuation. Here’s what you need to know about business valuation methods, so that you can put a firm figure on what your business is worth.
Reasons to value a business
There are several reasons to carry out a business valuation from time to time. It offers a great way to take stock of your financial health. Here are just a few of the benefits of a business valuation:
It gives buyers and investors a concrete price tag
It helps set a fair price for selling shares
It highlights underperforming areas
It pinpoints successful divisions and assets
It points the way to future growth
A thorough business valuation provides more than what you see on your profit and loss statement. It also gives business owners and investors alike a view of what’s working and what isn’t, so that you can make your business more sustainable.
Factors that influence business value
There are numerous factors that are considered in any business valuation calculator. The factors used will depend on the reason for your valuation, the age and industry of your business, and the type of valuation method used. Generally speaking, it could include things like:
Financial history – Financial statements form a key component of any business valuation, so it’s important to make sure your balance sheet, profit and loss statements, and cash flow statements are all up to date. Detailed finance records should show an investor how well you’ve managed costs in the past, your current state of play, and future profit projections. They’ll also show any outstanding debts and other liabilities.
Tangible assets – Any business valuation calculator will require that you include tangible assets. These include things like business premises, equipment and machinery, inventory, and client numbers.
Intangible assets – It’s not just hard facts and figures that factor into a business valuation. Intangible assets like trademarks, intellectual property, and customer relationships are all valuable as well.
State of the market – Is the market saturated with similar businesses or is yours unique? What is the current state of the economy? Valuing a business requires a look at the bigger picture, including industry-specific metrics as well as economic conditions.
What is a business rates valuation?
Within the UK, business property value is also used to determine the rates you must pay to the council. This is called a business rates valuation, determined by the Valuation Office Agency (VOA). Business rates are charged for most work premises, including shops, offices, pubs, warehouses, and factories.
You can use the government business valuation calculator to check your business rate valuation and determine what you’ll owe. The website also allows you to view valuation details of other businesses and challenge rateable value if you’ve discovered errors.
Business valuation methods
There’s no one-size-fits-all way to assess a business, as industries can vary so widely. As a result, you can choose from a number of business valuation methods to find the best fit.
An asset-based business valuation will tally up the value of all your assets, both tangible and intangible. It’s important to frequently update your financial records to record asset value accurately, taking factors like depreciation and inflation into account. You can then use them to calculate Net Book Value (NBV) by subtracting the cost of liabilities from the total asset value.
Another option is to use the entry valuation model, which uses calculations to determine what it would cost to start the same business from scratch. You’ll need to determine what start-up costs would look like, including the costs of employing staff, purchasing tangible assets, and marketing to grow your client base. It’s also handy to check your business rate valuation to see which rates would apply. If there are ways you could cut costs, these must be subtracted. For example, would the business be more cost-effective in a location with lower business rates? Subtract the difference to find your entry valuation.
Discounted cash flow valuation
A third method is to use the discounted cash flow model. This is a bit more technical, examining what a future cash flow would be worth today. It’s based on the time value of money, or the idea that £1 earned today will be worth more in the future, because it holds growth potential through earnings and investment. A business valuation calculator using this method adds together a dividend forecast over the next 10 or 15 years, adding a residual value at the period’s end.
No matter the method used to value a business, it’s an important task whether you’re securing investment or expanding current holdings. If you’re valuing your own company, plan ahead with detailed record-keeping and a strong business plan.
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