Five Important Factors That Determine The Actual Value Of A Business

Business evaluation is an indispensable part of the buying and selling process of an enterprise. Assessing a business without discretion is like a...

  • Five Important Factors That Determine The Actual Value Of A Business
    Liam Walker Image Liam Walker

    Five Important Factors That Determine The Actual Value Of A Business

    Business evaluation is an indispensable part of the buying and selling process of an enterprise. Assessing a business without discretion is like a catch-22 situation. If you underestimate the value, you may not be able to recover the loss you made. On the contrary, if you overprice your business, it will be challenging to find buyers for the venture. In most cases, the buyer is interested in the profits and cash flow and would ignore other costs borne by the owner which catapulted the company to its current position.

    For instance, the seller might have invested a lot of money in the appearance and interiors of the property, but the buyer may not be impressed with it. Consequently, the money spent on the decor will prove to be a waste of time, capital and resources for the owner. In any case, the outgoing owner needs help to determine the selling price of the trade to make a realistic return on investment. So if you are among those who have listed their business for sale in Australia, you must equip yourself with the knowledge of arriving at the logical figure.

    There are a variety of elements that influence the asking price valuation. The seller can consult professionals such as accountants and business brokers to come up with an acceptable cost or do it on his own. In either case, the owner must have all the company information documents ready for verification. Listed below are the five vital factors that help to determine the actual value of a business.

    1. The Marketplace Price Trends Prevalent In The Industry

    The value of a business is significantly affected by the industry in which it is operating and the current price trends dominating the market. You can look at other businesses, similar to yours in terms of size and operations, and inquire about their selling price to know the trend of the industry. Different industries have established different criteria for the evaluation of a business and the legal steps of selling a business in Australia must be understood to calculate the actual price in a systematic manner.

    For example, purchasing a mobile service business will be based on the number of customers using the service while buying a franchise business for sale will be dependent on the number of franchisee outlets. Additionally, many external factors affect the price range in an industry such as the condition of the economy, government regulations, market share and more. At times, the environmental factors such as a drought in NSW which affected the dairy farm business in the area and brought its sales down which in turn resulted in a lower selling price.

    2. Estimate the Future Performance of Your Business

    Positive bottom-line and increasing share prices cannot determine the future prospect of the business. Whether the company will be able to sustain its profitability or not is a matter of concern for the new buyer. Therefore, the seller needs to emphasise on the future growth possibilities and devise metrics to infer the long-term performance. The metrics can include sales productivity performance which will study the factors that led to sales growth in the past years and should involve examining the market share of the company, competition, and increase in profits.

    The second metric can be operations productivity which includes the cost of the property, delivery and supply-chain network. The third metric can be capital productivity which will involve assessing the utilisation of stock, payables and receivables. Analysing all these metrics will allow you to identify the long-term health of the company and present the picture to the prospective buyers with all the estimated figures.

    3. Projected Cash Flow and Return on Investment

    The cash flow is vital in ascertaining the value of the company rather than the profits. If the value of the assets is higher and the working capital is on the higher side, then the profits will get exhausted in reinvestment into the business. It means that there would be less money in hand and thus it would reduce the cost of the venture.

    Similarly, if the price of the fixed assets base and the capital requirement for daily operations is low, then the value of the business will gain a few points as the investment will be lower. Additionally, the return on investment formula can be used to establish the price. Selling Price = (Net annual profit/ROI) x 100.

    4. Using Business Assets to Calculate the Value

    This factor stresses on calculating the value of the business on the basis of the resources including both tangible and intangible assets. The tangible products include the office, the equipment, the inventory, and the fixtures while the intangible products include intellectual property, brand name, and goodwill in the market. It can become challenging to assess the value of the intangible items associated with an enterprise.

    However, you can create your own metrics to evaluate these components such as the goodwill of the company can be calculated by verifying the brand awareness, reputation of the company, customer database, supplier database, and customer relationship management service. When the asking price is based on the assets, the owner needs to deduct the depreciation from the final figure as the assets lose their value over time.

    5. Estimate The Cost of Setting Up The Business

    This method of evaluation can be carried out by the owner comfortably as he is the one who has started the business from scratch. However, you will have to estimate the cost of setting up the company in the current market which should include all the expenditures such as buying or leasing an office, purchasing inventory, marketing and advertising budget, recruitment and training of employees, getting the required licences and permits, research and development, digital presence, debts and loans, and more.

    EndNote

    All these are different criteria for confirming the price of the company. A person who has put up a business for sale in Australia can combine all these factors to derive a figure which justifies the cost of the company in all aspects. It is a good idea to involve business advisors and solicitors in the process to make it a smooth ride.

  • Author Info Liam Walker

    Liam Walker has been a business expert for around 40 years and had specialisation in the franchise sector. He is passionate about helping people by guiding and motivating them to become financially secure and independent through business. His free training sessions on “How to Achieve, What you Desire” has changed many lives for good. Business2Sell  is honoured to have Liam as their Guest Author.