Even if you’ve spent years toiling away to build a trade business, it can be hard to work out how successful it really is, and how to even define that success in the first place. For some, the simple fact that they’re consistently busy and turning a profit is enough. For others, it’s the number of staff and sub-contractors they’ve had to take on to deal with the added workload.
Yet if you’re uncertain of how to calculate the value of your business, it pays to undertake a thorough audit. There’s a lot to consider when valuing your business, and here we’ll explain why and when you should consider doing it, as well as the specific elements you will need to be able to put a price on.
Why value your business?
While it’s often done just prior to selling a venture to a new owner, working out the value of your business can also form the basis of your actions for the next few years. In fact, a valuation can actually be a key way to start the next phase of your enterprise, and be the basis for helping it grow. Being able to demonstrate the true worth of that business will go a long way in convincing funders, banks, and other financial backers that they should invest in you.
Internally valuing your business could also prove useful in determining fair pay rates, or even bonuses, particularly for those who toiled alongside you over the years, trading their sweat and hard work for your overall success.
You may, for example, find that valuing your business identifies certain assets and aspects that are doing you more harm than good, or that certain services aren’t as cost-effective as they could be, despite demand. Consequently, valuing your business can present you with the opportunity to make improvements, or even cuts if need be, and help you hone in on the parts of your tradesman business that generate the most profit.
How exactly do I value my business?
Whilst it’s true that you could outsource your valuation to a third-party, it’s easier — and cheaper — to do the job yourself. And the most important part of that job is determining the worth of all of your assets. That doesn’t just include your equipment, tools, van, and other essentials, but even intangible assets like your relationship with customers, your staff, and even your reputation. Effectively, the valuation process requires thinking about anything — no matter how intangible — that goes towards making your trade business what it is.
Take stock of your tangible assets
Let’s start with the basics and take a look at the assets you can accurately measure and account for — these are known as your tangible assets. These include your tools, any vehicles, office equipment, and everything else that can be measured and accounted for in your company accounts. To do this properly, you will need to start by working out the Net Book Value (NBV) of your business.
The main thing to remember is that, just because you paid a certain amount for something years ago, it’s unlikely to be worth the same today. Your van, for example, is likely to be valued for lower than you paid for it. Likewise, your tools, now well used, aren’t going to be worth as much as when you bought them brand new. Go online to check the kind of price those assets are going for today, in order to gain an idea of how much they’re worth, and how much you should include in your valuation.
Once you’ve valued your business’s tangible assets, you should then knock any outstanding debts off the total value. You will also need to take your business’s trademarks, website, and any investments you’ve made in marketing into account before settling on a final figure for your tangible assets.
Intangible assets — buried treasure for your business
Intangible assets are often easy to overlook, but are vital to determining the true worth of your business. As the name suggests, they don’t quite count as company property, nor anything you may have necessarily paid for in the first place. Instead, it’s a question of placing a value on the goodwill of your customers, and your reputation as a whole.
And although valuing a business is often done in advance of selling up, your worth may end up being negatively impacted if you are doing so under duress, which is most likely the result of poor intangible assets. By contrast, voluntarily selling your company will almost certainly give you a financial edge, as you will be passing your company on to a new owner along with all of the glowing PR and positive customer reception that comes with it.
Think of it this way — if you were selling, and every Google search for your business brought up scores of bad reviews, singling out your unreliability, would you get more or less than if you had a glowing reputation as a professional business who constantly delivers good work?
When it comes to your intangible assets, you may also want to consider the team that supports you, their skills, experience, and how crucial they are to your success. Similarly, although it seems hard to do on paper, think about the value of the relationships you have with both your long-term, regular customers, and your suppliers. In both cases, loyalty counts — you may be getting a discount with suppliers for being a loyal client, while attracting your own new customers costs much more than it does for existing ones.
Determining the entry cost
Having said all that, there is an easier method of determining the value of your business, and that’s calculating how much it would cost to found your business from scratch today. This is known as the entry cost.
To do this, you need to think about everything that went into creating your company, and what it took it to reach the level that it’s at today, including not only startup costs, but investments in marketing, staff training, and the time you spent building your customer base and reputation.
Adding all those is your first step towards creating a valuation. Next, subtract any savings you could have potentially made along the way from that total. If you could save money by using a different supplier, working with different sub-contractors, or by purchasing a different vehicle, then those savings need to come off. Once you’ve calculated that, you have your evaluation.
Price/earnings (P/E) ratio
Another method of determining your business’s value, particularly for those with a well-established record of generating profits, is the price/earnings ratio. This can be useful if you’re trying to attract funding or investment to take your business to the next level. Your P/E ratio will outline how much you have to spend for every £1 you make. Naturally, the lower the P/E ratio, the less it will cost to make a profit, and thus the more attractive you will be to potential investors.