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How to evaluate the worth of your business

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You know your business better than anyone. But are you the right person to determine what it’s worth to a buyer?

As an entrepreneur, your drive, ambition, and passion for your business have been a key factor in its success. But your dedication may cloud your judgment when it comes to estimating the value of all that hard work. You’ll need to balance what you think it’s worth, with what a potential buyer may think.  

Take the emotion out of appraising your business by learning about tried-and-true industry techniques and calculations to arrive at a fair and competitive asking price.

3 methods used by professional business valuators

Value of earnings 

Your business is a machine that produces revenue. You should be compensated for the time and energy that went into building it. A potential buyer will compare the cost of buying the business to the amount of revenue it produces. A thorough, favourable valuation will show that your operation represents a good investment of time and money.

Market-based value

Valuation experts have access to a lot of information about businesses just like yours. They can help you value your business through the eyes of a potential buyer who may be comparing your business to others for sale in the same category. This comparison might include:

  • Industry size and growth potential
  • Economic volatility
  • Number of employees
  • Number of customers

A professional business valuator can use all of this information to help you fine-tune projected earnings.

Value of assets

Sometimes, the most valuable parts of a company are the assets it owns. When this is the case, future earnings and the reputation of the company may be less of a factor than the immediate value of the assets on hand. In this type of sale, it’s critical to know the realistic market value of everything the company owns.

Comparing the valuation methods

Type of valuation Best when… What buyers look for… What you’ll need
Earnings The most valuable part of your business is the ongoing sales and profit it produces. Consistent cash flow and a healthy long-term market.
Healthy long-term future profitability.
3 to 5 years of financial statements.
Profit projection
Market-based Used as a comparison to competitors in your sector.
(May be used in conjunction with the earnings method)
Above-average performance.
Competitive advantage.
Great reputation.
3 to 5 years of financial statements.
Your organizational structure and number of employees.
Location and lease details.
Asset value
 
Physical assets (real estate, equipment, etc.) make up the bulk of your company’s value. A fair price for assets.
Long-term investment potential.  
A list of all the business assets, liabilities, debts and taxes.

 

What else matters?

These valuation methods are based on numbers. But your business is more than entries on a spreadsheet. You’ve worked hard to build a good reputation with your customers and attract good employees. Those things matter and they have value. In addition to crunching the numbers, your team can help you to determine a value for goodwill and talent equity.

Goodwill

Goodwill is the value of your good name and unique offering. Buyers who want to benefit from the competitive advantage attached to your name may pay a premium for the effort you spent in building a great reputation and loyal customer base.

Talent equity

The time you spent finding, training, and developing your employees and management team is worth money to a potential buyer. They can avoid the high cost of recruitment and training simply by keeping your top performers.

Get started

Choosing the right valuation method and working with business transition experts can pave the way to a smoother, faster, and stress-free sale. Start by talking to your Meridian Business Advisor about the approach that’s right for you and how to build your business-selling dream team<Link TBD: GS: Building your dream team of advisors for selling your business>.

Learn more about business transitions

A 6-step checklist for selling your business 

Building your dream team of advisors for selling your business

Exit strategies for selling your business 


 

Meridian Credit Union communications are intended for informational purposes only and do not constitute financial advice or an opinion on any issue. We would be pleased to provide additional details or advice about specific situations if desired.

For permission to republish this content, please contact the Meridian Credit Union Marketing Department at communications@meridiancu.ca. ©️ 2022 Meridian Credit Union