When you’re in the middle of all the day-to-day activities needed to keep a business operating, 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. It’s 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.
Valuing your business is part art and part science. In this article we’ll take a look at factors you should take into account (both tangible and intangible), and the most common valuation methods.
The ‘tangibles’ in your business are the things you can most easily measure. They include:
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 a retail business, 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 literally be worth their weight in gold.
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. They include:
Relationships with customers
Do you have regular customers who trust your business, value your product or service and will continue buying from you? Having a solid base of existing customers can add considerable value.
Reliability of suppliers
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 your industry at risk from external factors? For example, what is the risk of competitors taking market share from you? Could Government intervention (e.g. 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.
Intellectual Property (IP)
Having intellectual property that your competitors don’t have – for example specific expertise, technology or knowledge, designs or patents – can help you stand out and add significant value to your business.
Potential for growth
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.
There are three main ways of formally valuing your business:
An asset-based valuation takes stock of all the investments in your business. This way of valuing a business can be done on a going concern or a liquidation basis.
Earning valuation method
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.
Market value approach
A market valuation compares your business to similar, recently-sold businesses. This process relies on there being enough comparable businesses to judge against.
Establishing an accurate value for your business can be difficult - 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.