5 Things You Must Look For When Valuing Your Business

So you’re hoping to sell a business? Something you’ve carved in your own image, maybe for decades? Great - we’re excited for you! But we also want to stress the most critical part of what’s ahead . . .

The valuation. The price tag. The supreme assessment of everything you have built and accomplished, setting up the deal you deserve. 

As we’re fond of saying, 9 out of 10 companies don’t get sold. Usually, it’s because they’re overvalued, undervalued or haven’t even considered what they are worth in real terms. 

Avoid the losing lane. Stay confident and on track as we reveal the five key things we look for when valuing a business. 

1. Cash flow 

Okay, we need to talk about cash flow first. The amount of money dripping in and out of the company is often the strongest indicator of whether you’re a good bet or not. 

The big question is: how do you estimate it? Current cash flow is just the beginning. Buyers want to know what you’re going to bring in a year, two years or even five down the line. 

Most solid valuations use a 2-5 multiplier on their cash flow to arrive at a figure. Obviously though, the longer you gaze ahead, the harder it is to predict an accurate flow. That’s why we use Discounted Cash Flow (DCF) analysis, which looks at past results for income, interest, balance sheets and other factors, suggesting what’s next.

To manage DCF correctly, we find what’s called the Terminal Value (TV): the value that’ll either keep growing exponentially or until a finite point when operations will cease. 

2. Assets 

While cash flow is king, you’ll probably own a few business assets outright - the kind that won’t pass into the buyers hands. 

Knowing which assets are going to be part of the deal, how much they’re worth, and what you’ll keep for yourself, is extremely useful for valuation. 

We call this the Net Assets Value (NAV). You could, for example, have a sizeable amount of equipment, tools or physical property at your disposal. Or maybe your business makes money from a lot of intangible securities such as patents and trademarks. 

NAV essentially tots up the fair market value of every asset the company owns, then deducts any liabilities (debt, payment plans and interest). 

3. Complex debt and liabilities 

That being said, many businesses have a web of stuff they owe to creditors, banks, other financors and suppliers. Untangling it can be tough. 

The EBITDA model (Earnings Before Interest Tax Depreciation Amortization) takes all of your financial obligations into account. Business tax rates are covered, as well as climbing or falling interest on the debts you’re paying back. Meanwhile, EBITDA examines how your assets depreciate over time - both tangible and intangible. 

As you might expect, it’s a very detailed picture of what the company is bringing in after costs and asset risks are considered. 

4. The market 

Yep, you’re in a market of some sort, whether that’s broad or incredibly niche. Buyers may want to weigh up your comparable position. 

The P/S (Price-to-Sales-ratio) is really good for businesses that make their bread and butter by selling goods, rather than tying up finances in debt and equity. We uncover P/S by collecting the value of all outstanding market shares, multiply them by the share price, and divide that number by the total sales you’ve earned in the last year. 

This is distinct from, say, P/BV (Price-per-Book-Value) which stands for the net value any investor might get when they buy a share. Book value equates to everything shareholders would receive if they sold the company tomorrow. 

5. Inflation 

Lastly, let’s talk about the value of your sale right now or several years to come . . . It’s an essential part of a valuation you can trust. 

Why? Because an offer might look appetising in the short term, but actually shake out less than your business is worth in the long haul. Some buyers might want to pay you a fixed amount over five, 10 years or more. 

Inflation can then reduce the actual value of that number. £100 in 2025 won’t be worth as much in 2035, right? 

Therefore, we are sticklers for forecasting inflation for the terms of the deal. It’s important to work out percentages before agreeing to payment milestones. 

Of course, we’ve barely scratched the surface here. Our five lenses on your business valuation have so much more to uncover. Swerve mistakes, stress and head-scratching methodologies with our help: GreenRebell will move through every corner of your organization, while you’re able to focus on greener pastures and huge moves in your life. You’ve earned the freedom, after all. Get a valuation by speaking to us.