Understanding Business Valuation Before You Exit
When you start thinking about succession or selling your business, one of the first questions that comes up is, “What is my business worth?”
Many business owners have a figure in mind, but it is often based on gut feeling rather than evidence. The reality is, the value of your business is determined by more than just revenue or profit. It reflects the systems, people, reputation, and future potential that make the business attractive to someone else. And timing in the sale of the business could have a huge impact on the value at that point in time. There are always good and bad times to sell a business.
It is also important to be clear about what is actually being valued. Are you including business assets, goodwill, intellectual property, or property ownership? Defining what is for sale helps create a more accurate valuation and avoids confusion later.
Knowing what your business is truly worth gives you power. It helps you make informed decisions, plan effectively, and negotiate from a position of confidence. Also, knowing the current value compared to a future value if the business is improved or is growing will help plan more effectively for an exit or retirement.
Methods of Valuing a Business
There are several ways to value a business, and the right method depends on your industry, structure, and long-term goals.
Common approaches include:
- Earnings multiple: A multiple of profit or EBITDA (earnings before interest, tax, depreciation and amortisation). This is widely used and reflects the return an investor expects.
- Asset-based valuation: Suitable for businesses with significant tangible assets, such as property, vehicles or equipment.
- Market comparison: Comparing your business to similar ones recently sold to determine a fair market value.
- Industry-specific: Some industries have a metric of selling business that takes into account none of the above. E.g. a multiple or cents in the dollar value of turnover, like $1.30 for every $1.00 of recurring revenue. Or $3.00 for every $1 of subscriber revenue. These values normally need to be fact-checked against EBITDA valuations, but can be a good “rule of thumb” valuation for some industries
An experienced accountant can assess which method best suits your situation and help ensure the result reflects both current performance and future opportunity.
You may also consider engaging a business broker or independent valuer for a professional assessment. They can provide insight into current market trends, help identify potential buyers, and ensure your valuation is realistic and defensible.
What Increases Business Value
Strong systems, stable profits, and a capable team are the building blocks of value. Buyers and successors want confidence that the business can continue to operate without you at the centre of everything.
You can increase value by:
- Strengthening management capability and leadership depth
- Reducing reliance on the founder or owner of the business to make the transition easier
- Building and improving consistent profitability and reliable cash flow
- Documenting processes and improving operational systems
- Reducing reliance on a small number os clients, suppliers, or persons
- Maintaining accurate, up-to-date financial records
These improvements not only boost the eventual sale price but also make day-to-day operations smoother and less stressful.
Common Mistakes in Self-Valuations
One of the biggest mistakes business owners make is valuing their business based on emotion. Years of hard work, sacrifice, and commitment create a natural bias, but buyers will focus on facts, not feelings.
Other common pitfalls include:
- Overestimating goodwill or brand value without supporting evidence
- Ignoring current market trends or comparable sales
- Not factoring in risks such as key-person dependence or declining margins
- Not factoring in legal obligations, such as leave provisions for employees at changeover
It is also essential that the information you provide about your business is accurate and complete. Misleading or unclear details can cause problems during negotiations and may affect the final sale or transfer.
A realistic valuation requires objective data and independent analysis.
Why an Independent Valuation Matters
An independent valuation provides clarity and credibility. It gives you a professional assessment that can be used to plan your succession strategy, negotiate with confidence, and set fair expectations for all parties involved.
It also helps you identify areas to improve before you exit, allowing time to increase value and address potential weaknesses.
Professional valuations can also help you prepare documentation for future buyers, lenders, or advisors, making the transition process smoother when the time comes.
Succession planning is not just about who takes over but also about understanding the worth of what is being handed on. When you know the true value of your business, you can make smarter decisions about the next stage.
At Sharp Accounting, we help business owners understand, build, and protect the value of their business. Whether you are planning to pass it on or prepare it for sale, we can provide the clarity you need to move forward with confidence.
Do you need to know what your business is really worth?
Discuss your business valuation with us and begin planning your next chapter today.
