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How to value your business

From when to get a business valuation to how to help increase its potential price tag, explore the ins and outs of learning what your company is worth.

2 minute read

Determining what your business is worth is always a useful exercise, but it isn’t always a straightforward one. While the valuation process is more simple for some businesses, for others it can be a little less cut and dry. BNZ’s Head of Tech Industry, Tim Wixon, shares his thoughts on valuing your business, and protecting your company’s intangible assets.

The two simplest ways to value your business

“When it boils down to it, a business’ value is what someone is willing to pay for it,” says Tim. But when it comes to landing on an agreeable or defensible value, two of the most common and straightforward ways to go about it are:

Cash flow or earnings based

Businesses are commonly valued based on a multiple of earnings before interest, taxes, depreciation, and amortisation (EBITDA) or another financial metric like revenues. For example, if a business’ normalised EBITDA is $1.2 million and it’s valued at four times EBITDA, it’d be worth $4.8 million. “Depending on the industry, the market, the strength and size of the business, and the potential risks, as examples, such a multiplier can vary across a range,” says Tim. Discounted future cash flow valuation models are also often used, as an alternative or comparison.

Assets

Another common method is an asset-based valuation, which measures the value of any assets the business may own – be it your premises, your plant and equipment, stock, debtors, or intangible assets, such as intellectual property (IP) – less any debts and other liabilities.

Valuing your business when your biggest assets are intangible

In emerging industries – particularly tech – businesses are increasingly valued based on intangible assets.

Intangible assets generally don’t appear on a balance sheet – such as IP, customers, data, unique skill sets, processes, or the potential for future earnings.

“It’s not as easy to apply more traditional valuation processes to these emerging businesses and business models,” says Tim. But as more of these kinds of businesses emerge, new valuation practices are becoming more commonplace, such as valuations based on customers.

Tim explains that, as with any business, what a buyer is willing to pay will still ultimately tie back, to some degree, to the future cash flows the buyer thinks they can generate or save. “Whether that is from the business as a whole or some key intangible assets identified within the business, such as, the brand, platform, data, or contracts.” Finding the right buyer is as, if not more, important.

Help build your business’ value by getting things organised ahead of selling

As Tim explains it, a well-organised business is generally perceived as a lower risk option to potential buyers and investors. “And if there’s less risk involved, the perceived value will usually be higher,” he says. “Which generally means the more you’ve set up your business so someone else can step in and run with it, without you and other key staff, the better, value-wise.”

It helps if you make sure you get your house in order early – with a clear corporate and ownership structure, intangible assets protected, strong staff culture, robust processes, and thorough financial reporting from as early as possible.

When is the best time to value your business?

A majority of business owners only think about valuing their business when they’re getting ready to sell.

“Information is power, so there’s real merit in understanding how your business is valued, what drives the value creation in your business, and where you can create more value,” says Tim. Whatever stage your business is at, it can be beneficial to know what it’s worth and how your business would or could be valued.

Knowing your business’ value is invaluable

As well as helping you get your business ready to sell, it can also shed light on areas you need to improve. So whether the process for your valuation is simple and straightforward, or a little more complex, it’s a good idea to get it done with some regularity.

Get in touch with the right experts – whether that’s your bank, your accountant, or a valuation specialist – and they can either help you or point you in the right direction to make sure your valuation is as accurate and realistic as possible.

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Any views expressed in this article are the personal views of Tim Wixon and do not necessarily represent the views of BNZ, or its related entities.

This material is for general information purposes only and does not constitute, and is not intended as, personalised financial advice or as a replacement for legal advice. BNZ strongly recommends you seek advice specific to your personal financial or legal situation from a qualified adviser. Neither BNZ nor any person involved in the material accepts any liability for any direct or indirect loss or damage arising out of the use of, or reliance on, all or any part of the content.