The question “how much is my business worth?" has inevitably come up in the mind of an entrepreneur at one time or another. Understanding the value of your business is highly important not only to prepare for any eventual sale of the business but to enable you to monitor the progress of this venture as well. So, how much exactly is your business worth?
There are actually various ways to know the value of your business but ultimately, this value will be decided on how much others are willing to pay for it. The price of a business is often determined by EBITBA or Earnings before Interest, Tax, Depreciation, and Amortization. However, it is also important to remember that beyond number crunching, business valuation can also vary depending on a number of factors including:
In order to get the best price for your business, you need to focus on timing when you intend to sell. The overall economy and your industry can have a significant effect on your business’ valuation. Remember that a business that might be doing well right now may not be well-off in the next several years; this is true for any business establishment.
A business with a brand commands a higher price. Take the example of Coca-cola, its brand equity alone is worth $67.5 billion. Though to a lesser extent, this concept is also true for your business. If you have established a good brand with a loyal following, it will increase the perceived value of your business.
Supply and Demand
The worth of your business will also be determined by the Law of Supply and Demand. If there are numerous buyers who are willing to buy your business, it will drive the value of your business upwards. On the other hand, if there are numerous sellers but only a few business buyers, the worth of your business will go down.
Buyers are more willing to pay for a business with a solid growth potential. Do you recall the product life cycle stages? If your business is on its growth stage, your business can be worth more because of the anticipated demand of your product in the market.
Good Financial Management
Some of the aspects that will influence the value of your business with regards to its accounts include debtor management, creditor management, cash flow history, and its overall business management. Having no “skeletons in the closet" will make your business more attractive to a potential buyer and drive up its value.
The “quality" of your customers is yet another factor that has an impact on the worth of your business. For example, if you have established a solid relationship with blue chip companies, buyers will recognize the value of these relationships.
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