The most worn out phrase in the world of business valuations is that “it’s an art not a science”. This could not be more true, but what does it mean?
To put it simply, it means there is no technically right answer when it comes to valuing a business. It is only worth what someone is willing to pay for it, which means the values you estimate could differ from person to person, making the process highly subjective.
The valuation would also vary depending on whether you are buying the business as a going concern, or just its net assets. Valuing a business as a going concern would usually mean that a premium would be added to the acquisition price. This could be for: the benefit of taking on an established trading business; steady client base; reputation; loyal workforce; key management personnel etc., which is referred to as Goodwill. However, Goodwill may sometimes not exist in a business and a seller may still try to incorporate this into the acquisition price, leaving the buyer to pay a premium for essentially no reason.
It is for this reason that estimating a range of realistic values before negotiations or advertisements is essential. This would hopefully ensure that you either pay a fair price for your new business, or you attract enough interest from potential buyers and avoid it being on the market too long (which could also be seen as a negative in some cases).
There are a range of methods adopted in practice to value a business, whether it be for a potential sale or a target acquisition. Though many methods exist, not all would be relevant. Fortunately, Green & Co have a wealth of experience in valuing businesses for clients and can also assist with key strategic business decisions and the unavoidable tax implications, all under one roof.
If you would like Green & Co to help you value a business, whether that be your own or a target, then please contact us on 01633 871122.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.