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Analysing Your Business as an Investment

What’s your business worth to a buyer? Treat your business as an investment and it just might pay off.

When working with clients who are looking to sell their business, I am quick to point out that the value of a business is the amount the buyer is prepared to pay, and the amount the vendor is prepared to accept.

In a way it is like real estate, however, there is not a wealth of public information to draw on!

At LINK, we keep a large database of business sale records, giving us the ability to make comparisons and establish what a business is worth. Reviewing our records is just one step we take to come up with an achievable figure.

Valuing a business

There are several factors that come into play when determining the value of a business. First up, it is important to go through a process of benchmarking and checking what similar businesses in have sold for in recent times. This gives an initial idea of what your business might be worth.

From an accounting perspective, valuing a business is a matter of basing the price off the annual fees that are collected. It is also possible to apply a formula involving profits and the capitalisation of earnings.

However, the value of a business depends on more than just pure figures. A cafe or restaurant will be valued differently to a construction company or a mechanic's workshop, and will take into account different factors.

Buyer research

A buyer needs to do their research, examining comparable opportunities in the marketplace. Along with doing calculations, they need to factor in the current financials and profitability of the business.

Buyers also need to weigh up and assess the growth potential of the operation, as well as the risks involved with taking the business on. Another factor to consider is how dependent the business is on the people who are currently associated with it. 

All these factors will come into play, with each influencing the value of the business.

Regional vs city businesses

When valuing a business for sale, you must consider demand. Generally speaking, a business in Sydney will be more in demand than a business in a regional area.

In terms of price, we don't like to put a figure on regional vs city-based businesses because it depends on the type of the business and the service it is providing to the local area. For example, a business connected to the mining industry in an area like the NSW Hunter Valley could be highly valuable.

A regional business may also have great expansion potential due to the lack of competition in surrounding towns. A savvy buyer might spot and opportunity and be excited to take it.

Regional businesses may take longer to sell, but that doesn’t mean you can’t achieve a good price from a motivated buyer who can see future potential.

How to sell your business

As a business owner who is looking to sell, the more information you can share about your business, the better. This is why it is important to treat your business as an investment, right from the start.

By keeping good track of financial records, profits and growth, you will be able to give your potential buyers the details they need to make their own assessment of the value of your business. Do this, and you will make it easier to work together to find a price you are both happy with.

Sean Wolrige
LINK NSW, Broker

For further information about this article, contact your nearest LINK Business Broking Office.