Valuing your business can be done at a very simple level following the principles below. Ultimately the price will be what a buyer wants to pay, but this often follows a set formula:-
Business value = profit times a multiple
That’s the easy bit, the question is how these two components are calculated.
Profit in this case is “normalised EBTDA” – this means the profit of the business, excluding deductions for tax, depreciation or interest. The “normalised” term means adjusting the profit so that the cost of employing the directors is done fairly – for example, if you only take £8k as salary and £50k in dividends, your EBITDA will only have a deduction of £8k for a director’s salary. More reasonably a director could expect say £70k as a salary – so the EBITDA from the accounts will have to be reduced by the difference, in this case £68k. There are other potential normalisation adjustments that may be needed but the adjustment for the Director’s salary is by far the most common.
Calculating the multiple is highly subjective as it aims to reflect the attractiveness of the business.
The range of multiples can typically go from 3 to 10, but in practice mostly they are between 4 and 6. This assumes a turnover of over circa £1m per annum, below this prices are very subjective depending on the ability of the business to survive without the owner/manager.
Factors that improve the multiple
- Growing revenue (both past and future potential)
- Good recurring or contracted revenues
- Unique or progressive products or services with high barriers to entry
- Strong management team
- Strong existing acquisition activity in the specific sector
Factors that reduce the multiple
- Heavy dependence on the selling director(s)
- High dependence on a small number of customers
- Declining marketplace
- Poor processes and financial information
If the business has excess cash in the business this potentially could be added to the value calculated above. This can also be very tax effective.
If you would like a review of your business to asses its potential value, call Simon 01707 527870 or complete the form below.