As a former Dragon on BBC Online Dragons Den, serial entrepreneur and Scottish Sun Columnist Shaf Rasul gives us his tips on valuing a business or how to value a company. ,
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How do you value a business? You might think it’s a similar question to asking how long is a piece of string. Surely there’s no one-size-fits-all answer to this question? In today’s Ask Shaf, I’m going to shed some light on how to value your business and why it’s important that you know its true worth.
It’s vital you know the value of your business, and not only if you want to sell it. If you need to secure investment, want to set a fair price for shares or you want to start growing your firm, knowing its value is a basic part of that.
I was once offered a five per cent share of a business for £20,000. You’d be surprised at the number of people who don’t do the simple calculation to work out how much such a proposal would value the whole business at. I checked the owner was aware that with that proposition, the business was valued at £400,000. He was well aware but the business revenue had only been £7,500 in the past year and hadn’t yet made a profit. Could that seemingly high valuation be correct? Strangely enough, it might be.
I’ll explain why. Let’s take a step back from a business and look at houses. How do we know what our house is worth? We can check what similar properties nearby have sold for or ask an estate agent for a valuation. But you won’t know the exact figure until your house has been put on the market and has sold. That’s what market value is. It’s the price that a buyer pays for a house, a car or a business. The buyer decides what the business is worth.
An investor might be considering putting their money in your business. Any shrewd investor knows timing is key and their money will give you the chance to seriously ramp up the amount of business you are doing. Imagine the shape of an ice hockey stick on a graph. It starts fairly straight and then shoots up. It’s at that point smart investors want to get involved. That’s why the £7,500 a year business could be correctly valued at £400,000. The entrepreneur will have to know every single detail of his business and business plan to prove this to investors though. Rapid growth has to be just around the corner and potential investors need to be convinced of this too.
It goes without saying that an investor wants to make a good return. They could take a salary as a non-executive director but that reduces profits and cashflow, limiting business growth. They could take dividends but that’s only practical for a medium-term investment. What’s more likely is they will try to sell the business for way more than they invested. To do this, they need to show scalability – a huge growth in volume and a growth in profits.
Valuing a business isn’t an exact science but current profits and potential growth in the future is a great indicator. Ultimately though, it’s only worth what someone will pay and nothing is certain until everything is signed on the dotted line. What do you think? Let me know and don’t forget to like, comment and subscribe.
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