Most sectors of business have a formula for valuing the business based on a multiple of net profits. Accountants can usually provide the multiple for your sector.
If the multiple is, for example, five times net profit, then the value calculation is simple. Bear in mind that the selling price is what someone is willing to pay.
Right, that’s all the conventional wisdom. What really gets interesting is when you put in an equity building strategy that will increase the multiplier. This happens when you embark on a plan to build the business assets.
Here is the approach. An owner-run business can ask for a higher multiple when there are staff who are able to run the business when the owner is not there. When the business is not dependent on the owner, it is more valuable.
See also: A better way of doing business
If the business has a unique system that sets it apart from the competition, that increases the multiplier further.
The next level of increase comes by having the business be capable of bringing substantial new product ranges to market.
After that comes the ability to create new distribution channels that bring new clients to the business.
Then, if the business creates a strong brand that affects everything about the business, the multiplier increases still further.
The multiplier peaks when the business proves that it is scalable and could be rolled out nationally, for example.
Need more help? Speak to Graham Cook at GM and Co.