The company is typically the most valuable asset of a small business owner, and for many, it is also how they plan to pay for their retirement. However, what is your company’s genuine worth, and what sets a high-value business apart?

Predictably, each owner of a business is interested in its market worth.  Nonetheless, there are many businesses that struggle to sell, much alone earn a premium, for every one that achieves an attractive pricing point. What actually makes the difference?

The first question when approaching to sell a company is, “What are you selling?” This often includes fixtures and fittings, plant and equipment, inventory, and the company’s goodwill. In general, a buyer will not be interested in your liabilities, company structure, or attempts to recover outstanding debts. The bulk of business transactions include the selling of firm assets.

Except for the goodwill, these assets are quite easy to value. In general, there is consensus on the value of trading stock, plant, and equipment. Because goodwill is made up of many intangible assets that are difficult to measure, its assessment is often disputed. 

We can all agree that these assets have some worth; the issue is to what extent. Goodwill is defined as an estimate of the company’s future free cash flow.  The appraisal of anticipated earnings is determined by the organisational structure of a certain firm. The buyer is ready to pay for this.

This is important if the purchaser can predict future earnings and free cash flow with reasonable precision. In comparison, the risk of running a start-up firm is higher, and earnings are not guaranteed. A new firm often requires many years of loss-making operations before it can establish itself and begin to generate profits.  What you are prepared to spend to avoid the danger and “time to establish” component is referred to as “goodwill.”

As a result, what elements influence the value of a firm, and what are customers prepared to pay for? 

• A record of earnings, profits
• Returns on invested capital (higher than 30%)
• Strong expansion and growth possibilities 
• Brand name and its worth 
• A firm not dependant on the owners 
• A strong, verified customer base
• A sustained advantage over competition in the market
• Effective business mechanisms and processes

It is possible to receive a price that is considerably different from the usual. “Unique circumstances, businesses, and opportunities can always result in a “out-of-the-box” price.” Creating a one-of-a-kind item allows you to fetch a price that surpasses common expectations. Nonetheless, the market will eventually set the price. 

If you plan to sell your firm, you should consider who your prospective buyers could be. A prospective buyer may be ready to pay a significant premium for ownership of your firm because it has accretive value or is critical to their growth plan.

For any question you might have relating to business valuation, please contact Bates Cosgrave on 02 9957 4033.