Valuing a business for takeover

What determines the value of your business?

The value of a business is determined by a combination of financial data and future expectations. Key factors include:

• the turnover and profit from recent years
• assets such as stock, inventory, machinery or property (for example, your business premises)
• debts and other liabilities such as rental or lease agreements
• the number of regular customers or long-term contracts
• goodwill: these are the assets of a business that are difficult to quantify in monetary terms (for example, a reliable reputation, committed staff, specialist knowledge or a brand name)
• future prospects such as growth opportunities or risks

3 methods for valuing a business

There are various ways to determine the value of a business. The 3 most commonly used methods are:

1. Net asset value: this is the difference between assets and liabilities. This method is particularly suitable for businesses with many tangible assets, such as stock or machinery.
2. Discounted Cash Flow (DCF): this method looks at future cash flows. Expected income is converted to a current value. Suitable for businesses with predictable income.
3. Profitability value: this is the current profit, compared to the return a buyer would expect to achieve. The value increases if a business makes a structural profit.

Each valuation method has its pros and cons. An advisor can help you determine the value of a business and choose a valuation method that suits your situation.

What do you need to value a business?

With this information, an advisor or financier can better assess the value of the business:

• recent financial statements
• balance sheet and profit and loss account
• forecasts (expected turnover and profit)
• list of machinery, stock, and other business assets
• current contracts with customers or suppliers
• explanation of goodwill (such as brand, staff, processes)

Business value is not the same as the price

The calculated value is not usually the final sale price. The sals price is determined by the buyer and seller during negotiations. The final price depends, among other things, on:

• market developments
• financing options
• risks and expectations

Take into account when valuing your business

• The financial records must be accurate and complete. The buyer will usually commission a due diligence review to check the records and other business data. The seller draws up a sales memorandum for this purpose. This ensures the buyer receives sufficient information about the business and its value.
• Agree on the terms of the sale process and set these out in a declaration of intent.
• Both parties should sign a non-disclosure agreement (NDA) before disclosing or requesting any confidential information.