According to research by online business transfer agent, Bizdaq (November 2017), the average UK small business is worth £90,000 – £4,000 less than last year, but still more than the 2015 average (£89,000).
If your business is in the south, it’s likely to be more valuable, says Bizdaq, on average £2,000 more than elsewhere, although the average value of businesses in the south has fallen by £6,000, compared with an average decrease of £1,000 for businesses in the north.
The average value of a small business in South London is still £67,000 - £30,000 less than the average value in North London (£97,000) - but nowhere near as valuable as North-West London (£169,000), says Bizdaq.
Why value your business?
Bizdaq based its findings on data from almost 7,500 small-business valuations performed over the past three years, seeking to provide a reliable benchmark of how much an owner could expect to make from selling their small business.
But owners have their businesses valued for many other reasons, of course. Examples include getting a valuation done before introducing an employee share option scheme or selling a share in their business to an investor.
Business valuations are often required when an owner is getting divorced and a settlement must be worked out. Otherwise, a valuation can result from an irreconcilable dispute with a business partner or fellow director, when one party wants to buy the other out.
How are businesses valued?
Earnings multiples are often used to value established businesses. The P/E [price to earnings] ratio (PER) represents the value of a business divided by its post-tax profits. So, if your post-tax profits were £100,000 and you were offered £300,000 for your business, the P/E ratio would be 3. You could then compare this to the standard PER for your sector or business type to help you decide whether a fair price had been offered.
You might simply multiply your post-tax profits by the relevant PER to value your business, but you risk undervaluing your business if you ignore other factors, for example, if your profits are growing year on year or you have valuable assets within your business. Alternatively, you could overvalue your business if you do not factor in all liabilities.
Sometimes cash flow forecasts are used to work out the value of a business or there might be a “going rate” within a sector. Alternatively, value can be based on much it would cost to create a similar business (called “entry cost”). A business’s assets and liabilities are usually key considerations when valuing a business.
Factors that affect value
American investor, Warren Buffett (reported by Forbes to have a net worth of $78.6 bn – 27/11/17), describes valuing a business as “part art, part science”. According to Buffet: “Accounting numbers are the beginning, not the end, of business valuation,” because balance sheet figures alone won’t always tell you everything you need to know.
Likely future trading results are more important than previous trading history, while intangible assets, such as your intellectual property, brand, reputation, etc, can be hugely valuable. Older, more stable business with appealing assets and healthy monthly cash revenues usually have a greater market value than younger business with fewer assets and less predictable income. That said, newer businesses with unique knowledge, products or skills can be extremely valuable.
Valuing a business can be challenging and involve a lot of effort. And if you plan to sell your business, ultimately, your business, however much you value it, is only actually worth the price someone is prepared to pay for it. Take the time to explore all aspects that make your business what it really is, that way before taking any big steps you’re at least taking these with a clearer picture.
The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management. This article originally appeared on the KPMG Small Business Accounting website