Business Valuation: A Very Powerful Management Tool

How much is my business worth? The simplest answer to this often asked question is,

‘Whatever a buyer is prepared to pay’.

Value is, of course, a subjective concept. At its best, valuation is an art. It is influenced by institutional, macroeconomic and personal factors.

Given the subjective nature of calculating an accurate valuation range, it is tempting to avoid the exercise. However, if you are thinking about selling your business, raising new capital or, in the case of a family business, planning the succession process, this type of analysis may be critical to protecting your personal interests. Knowing the value drivers of your business should help you to change your focus from short term to long term in another word from being profitable to increasing the business value in order to build personal and business financial stability.

This series of article aims at giving you an idea of the methods used by the financial community, mainly relying on quantitative techniques to arrive at an estimation of market value for operating businesses, and subsequently refines the estimate to take qualitative or subjective factors into account. These qualitative factors constitute the art of valuation.

The focus of the articles will be on the significant emphasis placed by potential purchasers on subjective characteristics which cannot be discounted especially in the case of businesses with few tangible assets, low profitability… but with high Intellectual properties or specialised services.

First – let’s talk about the different kinds of value:

  • Liquidation Value: The estimated amount of money that an asset or company could quickly be sold for, such as if it were to go out of business. Usually a nominal amount of money
  • Goodwill Value: it represents the value of a company over and above its liquidation value.
  • Replacement Value: The amount that an entity would have to pay, at the present time, to replace the assets of the business. It is normally the  insurance value of the business assets
  • Investment Value: The estimated value of an investment to a particular individual or institutional investor. It may be greater or less than Market Value depending on the investor’s particular situation.  The investor  will look for potential synergies and will evaluate his potential Return on Investment by estimating risks verses reward to generate liquidity
  • Fair Market Value: The amount at which a business or property would change hands between a willing buyer and a willing seller when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts. – this is a fairy tale  – in the real world there always pressures and constraints on one party or another
  • Going-Concern Value: The value of a company as an ongoing entity.  Unlike liquidation value, the ability of the company to continue to earn profit is considered. This represents the Most Probable Selling Price This value is comprised of the value of its tangible assets plus intangible assets (goodwill)

Now that I have discussed the various types of value in my next articles I will talk about

  1. The value itself
  2. The Goodwill
  3. How to manage the goodwill

Find out if your company is sellable take the “Sellability Score” on our website it is free and confidential!

If you have a question or disagree with me please leave a comment on this blog.  I will respond promptly so we can have a fruitful discussion

If you like this article please share this link with your friends on social media, your Blog or by e-mail

If you envisage to transition out of your business in the near future and would want to explore what you should do please do not hesitate to call Jean-Bertrand de Lartigue on +44 1656 766 363 or e- mail him at JB@macint.co.uk

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