What's it worth?
Growing up with two brothers, "what's it worth?" was a common phrase in our house. "Can I borrow your cricket bat ….…yes, but what's it worth?" That would then start a process of delicate negotiations as to what would be offered in return. None of this ever involved cash, but even favours have a value!
Roll the clock forward 20 years and the phrase "what's it worth? is asked of me almost as frequently, however it's now said in a different context.
What clients are asking me, is what is their business worth? I might be being asked this because they are looking to sell up, or maybe looking to sell shares to a key employee or perhaps they are thinking about retirement planning. Quite often, someone asks the question more out of curiosity, rather than an immediate need to precisely calculate its exact value. If we have a business, we are all interested in knowing what its value is in the same way that we all want to know what are houses are worth, even if we have no intention of moving anytime soon.
My answer to this question will of course depend on why someone is asking me this. If it is out of curiosity, then it's likely that a brief conversation, covering some of the key principles will be sufficient. However, if someone is looking to sell their business, the process of arriving at a valuation will be more in depth.
It is often said that a business is worth what someone is willing to pay for it, however if that is less than its true value, unless forced to do so, would you really want to sell at that price?
If trying to agree a fair valuation for a business, there are a numerous different methodologies for doing this. Some are industry specific, some will be based on the underlying assets within a business (for example a property investment business) however, most will be based on some form of multiple of recent profits.
By establishing what those profits are and what multiple should be used enables us to arrive at a valuation, however, this is not an exact science and something as subjective as this might be just the start in determining "what's it worth"
If you are interested in obtaining a business valuation, please contact your local Perrys branch.
Article written by Simon Hayden