Working out how much your business is worth is an important part of preparing it for sale, but it can be a daunting process if this is your first time selling. An accurate valuation gives you a starting point of what price to ask for, as well as evidence to show sellers should they disagree. It can help with negotiations as well as give you a better vantage point to secure a higher deal. Today we’re looking at everything you need to know about valuing your business for sale in Melbourne.
1. Prepare all necessary documents and information
First of all, you’ll need to prepare a range of information to use when valuing your business. Potential buyers might want to value your business independently, so it’s a good idea to keep all of your documents organised and up to date. When valuing your own business, you’ll need the following information:
- Financial statements (ideally dating back five years), including cash flow, debts, turnover, and profit and loss statements
- Details of physical assets, including machinery, equipment, stock, and more
- Details of other assets, such as intellectual property
- Legal documents, such as leases and insurance policies
- Registration papers, including business name certificates, Australian business number (ABN) registration papers, licenses, permits, and more
- Employment, supplier, and customer details
- Market conditions, sales information, business history, business plan, and more
2. Consider enlisting the help of a professional
It’s always good to get a second opinion when valuing your business, especially if this is your first time doing so. An experienced business broker or advisor can help in a number of ways, including:
- Analysing finances
- Finding trends in the industry market
- Calculate the goodwill value of your business
- Estimate your future profit
- Work out the overall value of your business
Brokers will often also have a list of clients who might be interested in buying the business. They’ll have a better understanding and position in the market, too, increasing the visibility of your listing to hopefully attract more buyers and get your business sold quicker.
3. Choose your valuation method
You might not know that there is no set valuation method and you actually have the choice of multiple. This means that you can use a combination of methods to get your final value, and if you enlist the help of a professional, they can help you decide which is the best method to use. Some common methods for valuing your business are:
Current market values
How you value your business can depend on the type of business industry you’re in, as well as the marketplace value of a similar business. Industries usually come up with their own rules and formulas to value a business, so this method will depend on what industry you’re currently residing in. Again, a broker can help you navigate this valuation method.
Return on Investment (ROI)
Potential buyers will be particularly interested in the ROI of your business, so this can be a good way to value your business before putting it on the market. There are two ways you can calculate ROI, including:
- An ROI based on the selling price you have in mind
- Formula: ROI = (net annual profit / selling price) x 100
For example, if you want to set your selling price at $100,000 but want to test ROI based on that price first, and your business’s net profit was $25,000 for the past year, here’s how you’d do it:
ROI = (25,000 / 100,000) x 100
ROI = 25%
- A selling price based on an ROI you set
- Formula: Value (selling price) = (net profit / ROI) x 100
For example, if your ideal ROI was at least 50% of the sale, and your net profits were $50,000, you could work out the minimum price you’d accept by using this formula:
Selling price = (50,000 / 50) x 100
In this case, you’d need to sell your business for at least $100,000 to achieve an ROI of at least 50%.
Business asset value
You can use your business’s current assets to value it, too. Make sure you include both tangible and intangible assets, which are:
- Tangible assets are physical things you can touch, including tools, property, and equipment
- Intangible assets are things that can’t be touched but still hold value, including intellectual property, business goodwill, and brands
Once you’ve calculated the total asset value of your business, you can use this as an indicator of how much you can sell the business for. Calculating your asset value is difficult and subjective, so enlisting the help of a professional is often recommended here.
Future profit of the business
One of the most important things to a buyer or investor is how profitable a business will be in the future. You’re more likely to get a better price if your business is in a good position to earn more money in the future. Show the profit projections through financial statements, so buyers can get an accurate idea of the returns to expect from the business.
You can also predict future profits by looking at trends in the business’s finances from the past years, as well as trends in the industry. This information can be used in negotiations to help you settle on a better price.
Get in touch with an experienced broker today
Valuing a business often sounds easier than it is, but getting an accurate picture of what it’s worth can help you when selling. An experienced broker can help you determine the correct valuation for your business, helping to make sure you’re not under or over-valuing it. An accurate valuation with all necessary documentation can make your business as attractive as possible to future investors. Check out Melbourne based business brokers for a team of credible and experienced professionals who can offer you tailor-made advice when it comes to valuing your business ready for sale in Melbourne.
Find a Home-Based Business to Start-Up >>> Hundreds of Business Listings.
