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Valuing Your Business: Where to Start

Selling your small or medium-sized enterprise (SME) can be a daunting task, especially if you're a business owner without prior experience in the field of business sales.

With many SME owners lacking exit plans or not knowing where to start, Firebird Capital has often found the first question asked is: "How much is my business worth?"


This article is aimed at retiring SME owners who want to dive into the world of business valuation but aren't sure where to start.


Common Valuation Methods and Their Advantages/Disadvantages


When it comes to valuing your business, several methods are commonly used. Each method has its own advantages and disadvantages, and the choice of method often depends on the nature of your business and industry.


Here are some of the most common valuation methods:


Asset-Based Valuation: This method calculates the value of your business based on its tangible and intangible assets. It's particularly useful for businesses with substantial physical assets. However, it may undervalue businesses with strong earning potential but fewer tangible assets.


Market-Based Valuation: In this approach, you look at the prices at which similar businesses have recently sold. It's a straightforward method, but finding comparable businesses can be challenging, especially for small, private companies.


Income-Based Valuation: This method focuses on the income or cash flow your business generates. The two primary techniques within this approach are the Earnings Method and the Discounted Cash Flow (DCF) Method.

 

In our experience, the most commonly used methodology is the Earnings Method.


Earnings Method: If your business is trading profitably, the earnings method can provide a reliable estimate of its value.


It centres on the concept of sustainable earnings, a dependable measure of the cash profits your business generates each year.


The commonly used approximation of sustainable earnings is EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA provides a clear picture of your business's operational profitability.


To determine the valuation using the earnings method, you'll apply a multiple to the sustainable earnings:


Valuation = Sustainable Earnings x Multiple

 

Multiple Ranges


The range of multiples that businesses can attract is huge. For example, the PE ratio (the equivalent of a multiple, used by listed companies) for AstraZeneca on 15/9/23 was 34.23x. Meanwhile some small private companies with limited infrastructure or poor prospects might have a multiple less than 1x.


The list of variables affecting valuation is almost endless, but include industry, sub-sector, services provided, size of business, quality of management team, visibility of revenues, customer concentration, previous results and growth opportunities to name a few.


In practice, SMEs often see valuation multiples ranging from 2x to 6x or more of their EBITDA. Please note this is a rough guideline for the reasons mentioned above.


As an investor, Firebird Capital believes that some key variables affect valuation more than others and we have highlighted and explained them in a separate article. Click here for further information.

 

Business Valuation Tool


To help shed light on how Firebird Capital approaches valuation, we have created a Business Valuation Tool, that gives an estimated valuation range based on a few key variables.


Click here to use it. This preliminary estimate can then be further refined through a more comprehensive discussion with you, should you be interested in selling your business.

 

Who Else Could Value My Business


Here are some other experts who can help:

  • Accountants: Many qualified accountants have experience in business valuation can provide an accurate assessment based on financial data.

  • Finance Advisors: Financial experts can offer guidance on valuation methods and help you navigate the intricacies of the process.

  • Business Brokers: If you prefer a more hands-off approach, consider hiring a business broker who specializes in SME sales. They have access to networks of potential buyers and can guide you through the entire selling process.

  • Corporate Finance Providers: These professionals have the expertise to handle complex valuations, especially in larger SMEs.

 

Conclusion


In the quest to understand your SME's value, this article has aimed to shed light on the art of business valuation. Whether you're considering retirement or a change in ownership, grasping your business's worth is the crucial starting point.


We've explored common valuation methods, with a focus on the Earnings Method, a preferred choice for many SMEs. But, remember, valuation multiples vary widely based on factors like industry, size, and growth potential.


Our Business Valuation Tool is a useful starting point to get a rough valuation range. For a more precise valuation, get in touch with us or consult other experts like accountants, finance advisors, business brokers, or corporate finance providers.

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