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Do you know what your business is worth? Made you think, right? There are many ways to accurately measure the value of a business, and it’s important to know the best way to assess your business – plus the actual value, of course. As you may have guessed, this isn’t the most straight-forward process in the world. So, why does this matter?
What is a business valuation?
In the most basic sense of the term, a business valuation is literally a way to figure out exactly what your business is worth.
So how is this so complicated, I hear you asking. Well, many people measure the worth of a business in different ways. It’s not necessarily all about the profit. Some people value community contribution greatly, where others might believe historic profits are more important than projected profits.
A business valuation is a process that takes all these sorts of variables into account, and provides you with a better picture of where your business value and worth sits.
Why do I need one?
We know that life is a constantly changing experience, and having a baseline for your business worth will help you assess your position in a changing economic climate.
Knowing where the business market is trending against the job market will assist you in deciding whether it’s wise to consider selling your business, and give you a good idea of where you sit with your competitors.
A business valuation will also help you to decide on how much effort and/or investment is required in branding your business, or undertaking other activities to boost its value.
Okay, I’m convinced. How do I do this?
Step number one is working out how to best calculate your specific value variables. It’s probably wise to do this with an accountant, financial planner, or business specialist. You’ll want to look at data for other, similar businesses – things like how much businesses in your area or specialisation have bought or sold for in the past few years, and other market variables. A financial expert will have access to this sort of data to assist you.
Step number two is selection of a valuation method. This is also best done in conjunction with a financial expert, as it can be a pretty tricky endeavour. There are a couple of main ways that valuation is undertaken though, and these are:
- Net Worth
- Return on Investment (ROI)
Net worth is exactly what it sounds like. What’s the difference between what you owe, and between what you own? There’s your net worth. The tricky bit of this method is figuring out exactly how much your intangible assets are worth – things like intellectual property are hard to put a number on. This method also fails to take into account things like a clear trend for strong business growth, or conversely, a declining profit margin.
Return on Investment looks at a business’s annual net profit. How much are you bringing in this year, and how much have you been bringing in over the past few years? If that trend is looking good, some potential buyers might decide your business is worth paying above market price…except this method doesn’t necessarily take that into account. Net profit is more about looking at the security of the business than its potential for exponential growth or loss.
The complexities of the different valuation methods mean you may need to use more than one method – and that an expert is best positioned to help be define the real worth of your business.
How can YML help?
Talk to your YML Business Advisor today to see how YML Group can assist you with your business valuation. Contact us on (02) 8383 4400 or by visiting the Contact Us Page