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Valuing a small business – issues for you to consider when selling your company

October 8, 2011

Stock market quoted companies are valued according to widely accepted formulas, however there are no ‘standard’ ways to value small or micro businesses. This can cause real difficulties when it comes to buying and selling a small business, as the buyer and seller often have very different opinions on what the business is worth.

With this in mind, we look at some of the valuation issues that may arise if you are planning to sell your business, and how you can overcome them.

In reality, small businesses are rarely valued according to a rigid formula. So many other considerations come into play, especially when a small business is in a niche or unusual market.

Small business owners almost always attach a higher value to their assets than they are worth. It is not hard to see why; businesses built up from scratch are sources of pride for their owners, and the emotional ties you may have to your business are bound to view your enterprise through rose tinted glasses.

Valuing your business – issues to consider

Business owners often fail to take into account the extra costs a potential buyer will have to bear if they take over your business, such as:

1. Staff costs

You may well have been providing your own services ‘for free’, working longer hours than standard employees may have been willing to commit to. A buyer may have to pay for several new employees to replace you.

2. Tax rates

When working out future post-tax earnings for your business, if the buyer is a standard rate Corporation Tax payer, your company profits will be subjected to a higher tax rate than the small profits’ rate of 20% which applies to profits of up to £300,000. The net returns to the buyer will therefore be lower and this may be reflected in the business valuation.

However, with the main rate of corporation tax being cut to just 21% by 2014, this issue is rapidly being erased.

3. Economic climate

Your options will always be wider when the economy is on a sound footing. During a downturn, buyers will be more cautious, and it will also be more difficult for potential purchasers to finance the deal. These factors will obviously affect the valuation you could expect to achieve during such a climate.

4. Risk

Buying a small or micro business involves a higher risk than investing in a larger established company.

Rather like investing in some of the more juicy AIM stocks compared to FTSE 250 companies, buyers will be aware that many small businesses are far more vulnerable to external shocks or industry changes. This is another reason why you cannot value a small business using the valuation methods used to value more established companies.

For many small companies, the sale price will simply reflect how much a buyer is willing to pay for it, especially in industries where there are no common valuation methods, or precedents to take on board.

More help on ByteStart

For more tips and guidance on the various aspects of selling a business, read our other guides;

It goes without saying that you should always seek professional advice before selling your business, or a share in it.