How to value a business

Valuing a business can be one of the most worrying parts of buying an existing business.

There are several valuation methods you can use. For specific advice on valuation methods see our guide on how to value and market your business. Your accountant may be able to help you value the business, but a business transfer agent, business broker or corporate financier will be best qualified to provide valuation advice.

A healthy business

To get a general idea of how healthy the business is, look at:

•the history of the business
•its current performance - sales, turnover, profit
•its financial situation - cashflow, debts, expenses, assets
•why the business is being sold
•any outstanding or major litigation the business is involved in
•any regulatory changes which might have an impact on the business

As part of your investigations, talk to the vendor and, if possible, the business' existing customers and suppliers. The vendor must be comfortable with you doing this and you must be sensitive to their position. Customer and suppliers may be able to give you information that affects your valuation, as well as information about market conditions affecting the business. Such research can also be done on the internet or at your local reference library.

For example, if the vendor is being forced to sell due to decreasing profits, your valuation might be lower.

Intangible assets

The most difficult part is valuing the intangible assets. These are usually difficult to measure and could include:

•the company's reputation
•the relationship with suppliers
•the value of goodwill
•the value of licences
•patents or intellectual property

You should consider how the value of these assets could be affected if you decide to buy the business.

Other considerations

The list below details other factors that will affect the value:

•stock
•location
•assets
•products
•debtors
•creditors
•suppliers
•employees
•premises
•competition
•benchmarking - what other businesses in the sector have sold for
•who else in the sector is for sale or on the market

Once you have considered all these factors you can then decide how much you want to offer, or whether you want to buy it at all.

If you do decide to make an offer, and agree a price with the seller, a period of time is allowed for you to verify that all of the information you have been told is accurate. This is known as due diligence.


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