How to value your business

When you’re in the middle of the day-to-day activities needed to keep a business running, it can be hard to see the big picture. That’s why it can be useful every now and then to take some time out and consider the value of your business. 

This is a good way to measure your progress. It’s also a handy way to assess which parts of your operation are adding value, and which parts you may need to take a closer look at.

The ‘tangibles’ in your business are the things you can most easily measure.

These are things you can touch and feel that you’ve purchased for long-term use – like machinery and equipment, property and buildings, and vehicles. They’re the easiest items to value in your business, by simply researching what similar assets are selling for.

Stock is your inventory of products and/or product components. As with fixed assets, the value of your stock is easy to measure.

Where you are located can affect what your business is worth. For example, if you’re in retail, being in an area with high foot traffic can increase the value of your business. So can having easy access to transport if you’re a distributor.

Reliable staff are a true asset to any business. People who understand your business and your customers can be worth their weight in gold, and contribute to your business’ future earning potential by building customer loyalty and an internal knowledge base.

Intangible factors are things you can’t easily touch and feel. While these are harder to measure, they can add significantly to the value of your business. 

Having a solid base of existing customers who trust your business, value your product or service, and continue buying from you can add considerable value.

Having a network of reliable suppliers who can meet your requirements quickly and without problems will add value by helping you keep your business operating smoothly – and your customers happy.

What’s your competitive environment? If you operate in an ultra-competitive industry, for example, you might face pressure on your margins, which can affect the long-term value of your business.

Is your business or industry at risk from external factors? For example:

• What’s the risk of competitors taking market share from you? 
• Could Government intervention (such as new regulations) affect your profitability? 
• Could new technology or changing customer preferences radically disrupt your business? 

The fewer risks you face, the higher the perceived value of your business is likely to be.

Having intellectual property that your competitors don’t have. For example, specific expertise, technology, knowledge, designs, or patents can help you stand out and add significant value to your business.

What are the opportunities to grow and expand your business? For example, are there new regions or markets you could enter, or new products or services you could bring to market? Having realistic potential for growth is another factor that can make your business more valuable.

Once you have a good idea of your tangible and intangible assets, there are three main ways of formally valuing your business. This can be a complex exercise, so it’s a good idea to get an accountant or other expert involved.

An asset-based valuation takes stock of all the investments in your business (such as property, land, or machinery) and determines a fair market value for each asset. This way of valuing a business can be done on the basis of a going concern (if your business is still up and running) or a liquidation.

The simplest way to do this is to subtract your business’ total liabilities from the value of your assets. The resulting figure is your total assets.

Asset-based valuations can be useful because they can help to determine the cost of setting up a similar business, or indicate how much it would cost to replace all your assets (for example, in the event of a natural disaster). On the flipside, it can be difficult to calculate intangible assets, which form a meaningful part of your business’ worth.

An earning valuation leans heavily on the idea that your business’ true value is in its ability to create wealth downstream, somewhere in the future. The most common way to approach this is to capitalise past earnings, which involves looking at your business’ current cash flow, expected value, and annual rate of return.

There’s a bit of crystal ball-gazing with an earning valuation, which is why it pays to consult a professional. This method may also not be appropriate if your business is new, as you likely won’t have enough earnings data yet.

A market valuation compares your business to similar, recently sold businesses, taking into account a wide range of things like location, size, and customer base. 

Because it analyses similar businesses that have been sold, a market value approach can be helpful to determine the value of intangible assets. However, the process relies on there being enough comparable businesses to judge against.

Establishing an accurate value for your business can be tricky, but it’s important to get it right. Your accountant can provide more information on the different methods and factors you need to take into account. An ANZ Business Specialist can also be a good source of information on ways to add more value to your business.