Valuing a Business

2. What Kind of Business is It?

Three basic criteria affect valuation.

2.1 The circumstances of the valuation.

• An on-going business can be valued in several different ways (see 3).
• A 'forced sale' will drive down the value. For example, an owner-manager who has to retire due to ill health may have to accept the first offer which comes along.
• If you are winding up the business, its value will be the sum of its realisable assets, less liabilities (see 4).

2.2 How tangible are the business assets?

• A business which owns property or machinery has tangible assets.
• Many businesses have almost no tangible assets beyond office equipment. The main thing you are valuing is future profitability.

2.3 How old the business is.

A young business may have a negative net asset value, yet may be highly valuable in terms of future profitability.

• Many businesses make a loss in their first few years.