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Valuing your business can be a tricky process. Simply put, a business’ value is what someone is willing to pay for it. However, in reality, your business likely has many assets, including: 

  • income; 
  • debts; 
  • intellectual property; 
  • equipment; 
  • goodwill; and 
  • other moving parts. 

Valuing assets is especially tricky if you have a significant number of intangible assets. Thus, accurately valuing your business can be a significant challenge. Typically, business owners opt to engage a professional to value their business.

This article will outline why it is essential to have your business valued, how to prepare to increase your business’ value as much as possible, and the process by which you can value your business.

Why Should You Value Your Business?

There is a huge benefit in understanding your business’ value. This will allow you to determine what creates value in your business and how you can create more value. There are also benefits if you are thinking of selling your business. This is because you can make plans according to the probable amount you will be getting.

However, it is good to remember that the figure you receive from a valuation is not necessarily what you would get if you sold the business tomorrow. It is not an amount etched in stone and cannot be changed. Indeed, there will be adjustments throughout the negotiations of the selling process based on what is essential to the buyer and seller.

What to Do Before Valuing Your Business?

Potential buyers or investors will generally perceive businesses as more valuable if they are well-organised, with competent management and good processes. If your business can be taken over and remain running effectively without too much additional investment, it indicates to potential investors that it is a lower-risk investment or purchase. Therefore, if you are planning to get your business valued, it is a good idea to make sure that you iron out any issues within the running of your company. Further ensure that all management and processes are clear, clean and accessible. For example, seek to protect your intellectual property through trade marks and ensure that your financial records are in order. These can contribute to an improved valuation for your business.

How Do You Value Your Business?

When you value your business, it is crucial to be able to determine the fair market value of your business. The standard for this figure is determining what a willing seller would pay. 

A willing seller is someone who is not acting under compulsion and who has an understanding of the relevant facts. Simply put, how much a seller would pay for your business, with an understanding of the positives and negatives? 

There are a few different ways that you can calculate this figure. Likewise, the most commonly used method in New Zealand is the Earning Based/Multiplier method.

Earning Based/Multiplier Method

Businesses in New Zealand are often valued on the basis of their EBITDA (earnings before interest, taxes, depreciation, and amortisation). This amount would then be multiplied by a multiplier. This multiplier is based on several factors such as the:

  • market;
  • industry; 
  • size; and 
  • strength of the business.

Calculating the EBITDA

You can calculate your EBITDA by adding the Net Income + Taxes + Interest Expenses Deprecation & Amortisation. 

The income is the profit your business makes. You then subtract the costs of operating the business and taxes you have to pay. Overall, this gives you the net operating costs of the business. These include things like taxes.

You can use Amortisation and Depreciation to calculate the value of business assets over time. Amortisation shows how the costs of an intangible asset can be spread out over the asset’s useful life. A company will benefit from an intangible asset for many years, so it is helpful to spread the costs over this period to calculate the overall amount the intangible asset will provide. 

It is similar to the process of depreciation of a tangible asset. This is useful for companies that work primarily with intangible assets like patents, software, or franchise agreements.

Calculating the Multiplier

Several factors will influence the ‘multiplier’ value of your business. Primarily, these relate to any risks or security that your business may have. Such factors include:

  • how risky your business is;
  • how risky the market is;
  • the size of the business;
  • how established the business is;
  • how unique the business is; and
  • evidence of future successes. 

Usually, this number is between 2 and 4. Therefore, it is best to understand these elements of your business before you get it valued.

The overall calculation will determine the value of your business.

Different Methods of Valuation

Additionally, there are a few alternative methods of valuation. Note that these are less common in New Zealand. However, it is important to choose the method that is best for you and your business.

Future Cash Flow

One valuation method uses the discounted future cash flow. This technique estimates the value of a business today, based upon projections of how much money that business will make in the future.

Asset-Based Valuation

This valuation method takes stock of all the assets and investments that your business has. However, it can be difficult to calculate a business’ value if most of your assets are intangible. This will often be the case if your business is a software company. Indeed, your assets will not necessarily appear in documents or proven impact.

Earning-Based Valuation

An earning valuation determines what the possible future earnings of the business may be.

Market Value Approach

This approach involves looking at what other businesses of a similar nature, in a similar field, have sold for recently. This method is typical for businesses with a significant number of intangible assets. The reason is that calculating a significant number of intangible assets through traditional EBITDA methods can be challenging.

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Key Takeaways

Getting your business valued is a fantastic way to better understand what potential purchasers might be willing to pay for your business. It may also incentivise you to improve processes, such as protecting intangible assets and improving record keeping. Additionally, it is vital to ensure that your business is running as smoothly as possible. This includes putting all its paperwork and processes in order before seeking to value your business, to get the best possible result. Further, you can choose from several different valuation methods to estimate what your business might be worth.

If you need help with selling your business, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

Should I only get my business valued if I am about to sell it?

No, getting your business valued is helpful at any time. It will provide insight into the strengths and weaknesses of your business. Valuation will allow you to understand how you can capitalise on your business’ strengths. Further, it will provide suggestions for improvements to ensure you are operating as effectively as possible.

Does it matter if my business is made up entirely of intangible assets?

Not at all. Your intangible assets still provide value to your business. Make sure that you are protecting any ones that you may need to through trademarks or other methods.

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