You’ve spent years toiling away to build a successful trade business, but do you know how successful it really is? What’s more, how do you even define that success in the first place?
For some, the simple fact that their 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 that shows their a successful company. Yet if you’re to get a true idea of what you’re business is really worth, it pays to undertake a complete and thorough valuation.
Wait – isn’t valuing a business something that most people only do when they’re thinking of selling up?
Sure, if you’re planning on handing over the reigns and heading off into the sunset to retire with your hard-earned millions, then yes, having your business value is going to prove essential to ensuring you get a fair price.
Yet that isn’t the only time that a valuation proves vital.
Why value your business?
If you’re thinking of growing your business, then being able to demonstrate the true worth of that business will go a long way in convincing funders, banks, and other financial backers that you’re worth the investment. Valuing your business could also prove useful in determining fair pay or bonuses for those who toiled alongside you over the years, trading their sweat and hard work for your overall success. That’s not to mention the fact that a valuation can prove incredibly useful when it comes to taking stock and preparing for the future.
You may, for example, find that valuing your business identifies certain assets and aspects of your business that are doing you more harm than good, presenting you with an opportunity to eliminate those, improve others, and focus on what’s helping you generate the most profit.
Whatever the case may be, that does leave one important question:
How exactly do I value my business?
Whilst it’s true that you could always outsource your valuation to a third-party company, you didn’t read this far for such a cop-out answer.
Worry not, dear tradesman, you haven’t wasted your time.
Here, we offer up our complete guide to everything you could possibly need to know when it comes to valuing your trade business.
What to value – tangible vs. intangible assets
When we talk about your business, what we’re actually talking about is the grand sum of all your assets. That doesn’t just mean your equipment, tools, and other essentials like your work van, but even intangible assets like your relationship with customers, the team you employ, even your reputation and catalogue of online reviews.
Indeed, anything that contributes towards making your trade business what it is needs to be at least considered during the valuation process.
Let’s start with the basics and take a look at tangible assets – those that can accurately be measured and accounted for.
Taking stock of tangible assets
To do this properly, we’re going to need to start by working out the Net Book Value (NVB) of your business. Yes, this involves your tools, your vehicles, office equipment, anything that can be measured and accounted for in your company accounts.
Remember, that just because you paid a certain amount for something years ago, that doesn’t mean that’s what it’s worth today.
Your van, for example, is likely to be worth less than you paid for it. Your tools, now well used, aren’t going to be worth as much as when you bought them brand new. Going online to see the kind of price those assets are going for today will give you an idea of how much they’re worth, and how much you can include in your valuation.
Remember too, that if your business has outstanding debts, these will need to be knocked off the total value. Other things you’ll want to consider include your business trademarks, your website and any investments you’ve made in marketing.
Intangible assets: the hidden value of your business
Intangible assets are those things which are often easy to overlook, but which are vital to determining the true worth of your business. If you’re carrying out a valuation because you’re being forced to sell up, that’s likely to have a negative impact on your worth, compared to doing it voluntarily because things are going well.
Never underestimate the importance of your reputation, either. Even if you’re not valuing your trade business to sell up, it’s still something worth taking into account.
Think about it: if you were selling, do you think you’d get more if every Google search for your business brought up scores of bad reviews about how unreliable you are, or if you had a glowing reputation as a professional business who constantly delivers good work?
Other aspects you’ll want to consider include:
- The team that supports you, their skills, experience, and how much they’re crucial to your success. If somebody bought your business but didn’t keep your staff on board, what impact would that have?
- Your relationships with long-term, regular customers. Remember, it costs much more to acquire a new customer and carry out a job for them than it does to carry out the same job for an existing customer.
- Your relationships with suppliers. Does it cost you less to buy supplies because you’re a loyal customer than it would if you were a brand new customer? How does that affect your worth?
Determining the entry cost
Having said all that, there is an easier method of determining the value of your business: calculating the entry cost, or how much it would cost to create a similar business from scratch today.
Think about everything that went into creating your business and building it to the level that it’s at today. That includes, not just startup costs, but marketing investments, staff training, time spent building a customer base and a reputation.
Adding all those up is your first step towards creating a valuation, but it isn’t the only step. Next, you’ll want to subtract from that total any savings you could have potentially made along the way. If you could save money by using a different supplier, by working with different sub-contractors or by purchasing a different vehicle, then those savings need to come off.
When you’ve done that, you have your evaluation.
If that still isn’t enough, there are other methods you can use:
Price/earnings (P/E) ratio
A common option for businesses with a well-established record of generating profits, your P/E ratio can be useful if you’re trying to attract funding or investment to take your business to the next level.
At the basic level, P/E ratios outline how much you have to spend for every £1 of earnings. Naturally, the lower the P/E ratio, the less it costs to make a profit, and thus the more attractive you are to potential investors.
A simple formula dividing the market price per share over the earnings per share is used to create this ratio, though if that sounds a little complicated, there are plenty of guides and tutorials – such as this one from Investopedia – that you can use to help you out.
Other methods, such as using Discounted Cash Flow to estimate what potential future profits would be worth today, can also be used to value your business, though most tradesman typically find that these aren’t as well suited to their business as the methods listed above.
If you’ve used a different valuation method in the past, why not tell us about in the comments below? Alternatively, get involved on Facebook or Twitter and let us know how you’ve benefited from valuing your trade business.