How to value your new business

Understanding the value of a business opportunity and your new business start-up is a useful exercise - especially when applying for funding and loans.

Knowing the value of a business is important, especially if you want to present your business opportunity to potential investors or apply for a small business loan.

New business owners pay close attention to the value of their business, both to ensure that they're developing a business that's growing in value and so they can raise increased amounts of funding as they look to expand.

Working out the value of your business and its potential isn't 100% scientific, however.

Small business owners tend to view their business as being more valuable than an investor looking at the same business.

Follow these steps to get a better idea of the value of the business opportunity and your start up.

Build a three-year forecast

Using your business plan, create a three-year cash flow, and profit and loss forecast of your business to do this.

While it's impossible to accurately know the future of your business, make realistic assumptions such as customer growth, success and return on investment of marketing activity, while allowing for costs such as inflationary increases in salaries and the cost of materials.

Fully account for all running costs, including taxes (National Insurance and Corporation Tax), as well as any interest in loans or debts the business will take on.

Calculate the book value of your business

The book value of a business is straightforward - it is the value of all the assets the company owns, minus its debts, if the business was closed and assets sold.

Assets aren't limited to physical assets such as plant equipment.

Outstanding customer invoices and intellectual property are also types of asset and have a value.

A simple book value adds up the sum of any assets the business owns, accounting for any depreciation where the value of an asset has decreased over time, and subtracts its liabilities that it must pay.

Calculate business earnings and EBIT

Business earnings can be used as a baseline to calculate the future earning potential of the business, and earnings are used by investors to assess the strength of the value of your business.

To calculate earnings - often referred to a EBIT (earnings before interest and tax) - simply calculate the sum of all business income minus costs but before taxes such as Corporation Tax.

A typical start up will use a three-times multiplier - multiply your EBIT sum by three to get an upper range of the value of your business.

Someone looking to buy your business might use this to set the price they're willing to pay for the business.

For example, if EBIT was calculated at £50,000, the upper range or price for the business would be £150,000.

Get quotes from business experts

Use business experts - such as angel investment networks - to help determine the value of your business.

Attend investment sessions armed with your business plan, earnings and book value of the business to pitch the business.

Obtain quotes for buying the business from financial experts, then average them to obtain a price the market would be willing to pay for the business.

Investors are a good source to understand the value of your business as they see hundreds of businesses each year and have a good understanding of their worth.

The downside is that the worth they value your business at the price someone would pay for it - even if you think it's worth more.

Rule of thumb assessment

Apart from financial forecasts, there are lots of intangibles when it comes to valuing a business opportunity.

Questions such as the uniqueness of the business, the number of competitors, and the expertise of the team running the business all contribute to the value of the business.

A company with a strong management team, a unique product or even a patent, plus low competition might not have many assets, but it will have a high perceived value.