Why Accurate Valuation Matters
Setting the right asking price is one of the most important decisions you will make when selling your business. Price it too high and you will deter serious buyers, leaving your business languishing on the market. Price it too low and you leave money on the table. An accurate, realistic valuation based on current market conditions is essential for achieving a successful sale within a reasonable timeframe.
At Watkins Commercial, we have been valuing businesses in Brighton, Hove and Sussex since 1980. Here we explain the main methods used and the factors that influence what a buyer will pay.
Method 1: Earnings Multiple
This is the most common method for valuing small and medium-sized businesses. It works by taking the adjusted net profit (sometimes called the "true net profit" or "owner's benefit") and multiplying it by a factor that reflects the type and quality of the business.
The adjusted net profit takes the declared profit and adds back any discretionary expenses that a new owner might not incur, such as the owner's above-market salary, personal vehicle costs, or one-off expenses. The resulting figure represents the true earning potential of the business.
The multiple applied varies by sector and circumstances but typically ranges from 1.5 to 3.5 for small businesses. A well-established restaurant with a long lease and growing turnover might command a multiple of 2.5 to 3, while a newer takeaway with a short lease might attract a multiple of 1.5 to 2.
Method 2: Asset-Based Valuation
This approach values the tangible assets of the business, primarily the fixtures, fittings and equipment (FF&E), plus any stock. It is most commonly used for businesses that are not trading profitably or where the physical assets represent significant value.
For example, a recently fitted-out restaurant with a high-quality commercial kitchen might have fixtures and fittings worth considerably more than the goodwill based on trading figures alone. In such cases, an asset-based valuation may produce a higher figure.
Method 3: Comparable Sales
Just as with residential property, looking at what similar businesses have actually sold for provides valuable context. An experienced business transfer agent will have detailed records of completed sales in the local area and can draw on this evidence to support a realistic valuation.
However, it is important to note that no two businesses are identical. Differences in location, lease terms, trading history and condition mean that comparables should be used as a guide rather than a definitive answer.
Key Factors That Affect Business Value
Regardless of which method is used, several factors will significantly influence the value of your business:
Location
A prime high-street position in central Brighton will naturally command a premium over a secondary location. Footfall, visibility, parking and accessibility all play a role.
The Lease
The lease is often the single most important factor. A long unexpired term (15 years or more) at a reasonable rent provides security and adds significant value. Conversely, a short lease with an upcoming rent review can substantially reduce a business's worth. Buyers want to know they have enough time to recoup their investment and build the business.
Turnover and Profitability
Consistent or growing turnover demonstrated through verified accounts is highly attractive to buyers. Erratic trading patterns, declining sales or reliance on a single customer raise concerns and typically reduce value.
Goodwill and Reputation
A strong brand, loyal customer base, positive online reviews and established reputation all contribute to goodwill. This intangible asset can represent a significant proportion of the total value, particularly in service-based businesses.
Condition and Equipment
Well-maintained premises and modern, efficient equipment reduce the buyer's need for immediate capital expenditure and therefore increase the attractiveness and value of the business.
Staff
A reliable, experienced team that is willing to stay on after the sale provides continuity and reassurance to buyers. Key person dependency, where the business relies heavily on the owner's personal skills or relationships, can reduce value.
Getting a Professional Valuation
While online valuation tools and rules of thumb can give a rough indication, there is no substitute for a professional market appraisal conducted by an experienced business transfer agent who knows the local market intimately.
At Watkins Commercial, we offer confidential, no-obligation business valuations. We will visit your premises, review your trading figures, assess the lease and provide you with an honest, realistic assessment of what your business is likely to achieve in the current market. Contact us on 01273 709090 to arrange an appointment.