Q&A: Valuing a business

Whether you want to sell up altogether or just attract investment, you'll need to find out exactly how much your business is worth. So how do you go about it?

Rob Harman, partner at accountants Morris Owen and adviser to Business Link Berkshire and Wiltshire, talks to Georgina Harris about the best ways to value a business.

What are common reasons for valuing a business?

RH: The most common is disposal: needing a valuation to sell a business. If you're trying to attract investment, valuation is vital. You can also use the process to identify areas of a business that need improving.

How do I begin?

RH: Basically, there are two steps. Firstly, you assess a range of factors about the firm. These must show that the business is healthy, has solid prospects and that its management is organised. Secondly, you use pricing techniques based on results of the assessment.

How do I show my business is healthy?

RH: Start with your firm's finances. Look at cashflow - previous, current and projected. Proving your financial reliability is important. Also work out how efficient you are at cost control. Many firms are sold cheaply because prospective owners believe they can reduce the current owner's spending.

How do I show the firm has good prospects?

RH: You need an established trading history to show that your business has potential to generate profits in the future. Assets are important, too [premises, stock, IT, equipment]. Orders are also significant assets. You need to show that your business has a range of good clients. But remember that while some buyers are drawn to a wide range of clients, others might only be interested in a section of your market.

You will have to include information on any debts and liabilities you have, of course.

How valuable is management?

RH: The value of many small businesses depends a great deal on the owner or key managers. Many owners and managers find that clients are committed to them personally - not just the business. Decide whether you plan to continue being involved under new owners. You also need to consider other key people in your business.

How do I arrive at a figure?

RH: Many valuers use a range of methods, much depends on the type of business. For example, the 'multiple-of-earnings' technique is popular. You multiply annual profits by a set figure - normally between four and seven times.

The discounted-cashflow technique works on the idea that a business's value is based on the cash it generates. Useful for firms with steady earnings, valuation is based on estimates of future revenue, discounted to take account of how long the money will take to come in.

How do I reach the final price?

RH: Check your valuation against amounts similar businesses sell for. It's vital to remember that a business is only worth what someone will pay for it.