You’ve put your heart and soul into your business. Years of passion, dedication and plain hard work have gone in to get it to where it is.

But what would your company really be worth if you sold it today?

Accounting Heart director Sonia Gibson says the most common way to value a business is based on future maintainable earnings—an adjusted average of profits over a number of years.

This is then multiplied by a number, based on risk, cashflow, tax rates and interest rates.

“That [multiple] may be as low as one times earnings and it can be five, six, ten times earnings, but normally for most businesses it’s two and a half to three times earnings,” she says.

“The multiplier is all about managing your risk factors… does the business have a strong brand, does it have a plan, does it have strong cash flow, does it have budgets, are there procedures in place?”

Sonia says it’s common for entrepreneurs to overestimate the value of their business, just as home owners often overestimate the value of their property.

“It’s like a house, someone has invested a lot of time and money so it is only natural that it is their pride and joy,” she says. “People look at it through those eyes, think ‘my business is perfect’ so to speak, and they tend to overvalue it.”

When your company is worth more

Of course there are exceptions to the rule and some companies can defy expectations.

Sonia had one client with a business that on paper was only worth $20,000 but sold to another company for one million dollars.

“The business had a piece of software and, to a lesser extent, a small client base that a UK-based company wanted to facilitate their launch into the Australian market,” she says.

“This was a cost effective strategy for the UK company, who then didn’t have to develop the software and market for themselves.

“It is called a strategic sale… you’ll get potentially a higher price for your business because somebody wants it for some other reason than the cash flow that it would generate in its current state.”

Sonia says ultimately a business is worth what someone’s prepared to pay for it, and intellectual property forms a large part of the price you can command.

She says it’s particularly important for science companies to have any processes and intellectual property covered by a patent or trade mark.

“That’s a large part of what they are selling, and if they don’t have that protected they don’t really have anything to sell,” she says.

Maximising your sale price

If you’re thinking about selling your business, there are things you can do to make it more attractive to potential buyers.

“What you want to do is maximise your profit and your cash flow and minimise risk,” Sonia says.

“If directors have been taking out more than market salaries, then you adjust your profit and loss to reflect market salaries.

“If there’s been additional travel costs, say for example you fly business rather than economy, then you adjust travel expenses to reflect economy airfares.”

You can reduce risk by diversifying your customer base and making sure the business is not overly reliant on key personnel, Sonia says.

A company that is already well set up and running smoothly is also going to be more appealing to buyers.

“If you have got a business that’s got strong cash flow and it’s got all the systems and processes in place, and you don’t need to spend hours and hours day to day of your time working in the business, it will be more attractive to a buyer and you will have something that’s going to be worth a lot more,” she says.

Don’t want to sell?

Even if you’re not thinking about selling, knowing what your business is worth is useful for succession planning and insurance purposes.

“Many people use their businesses for retirement planning… so it can be a large part of their overall wealth strategy,” Sonia says.

She recommends starting with the end in mind, including having agreements in place in the event of a partner or major shareholder wanting to sell their part of the business or passing away.

“Sitting behind all that is a plan… you need to be able to look at where you are now, where you want to go, how you’re going to get there,” she says.

 

To find out more about what your company is worth, speak to your accountant.

 

Sonia Gibson

Sonia Gibson has been a chartered accountant and business advisor for more than 20 years.

Her professional career includes working as a partner with leading Sydney accountancy firms, and she has extensive experience ranging from publicly-listed companies to individuals and small businesses—each with their own set of unique circumstances.

Sonia founded Accounting Heart after becoming frustrated with the limitations of traditional accounting firms.

She saw the need for a different approach to financial matters that incorporates both the head and the heart, particularly in situations where life and finances collide.

Establishing the firm gave Sonia the perfect way to combine her love of all things numbers with her passion for helping others.

Hardworking and trustworthy, Sonia prides herself on gaining an in-depth knowledge of her clients’ businesses and financial situation.

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