By Chris Smith

It’s almost never an easy decision as an entrepreneur to sell your business; it can be even harder still to settle on a valuation. The process of valuing a business can be complex but is an incredibly important one to get right. An accurate valuation not only means a sale is much more likely to go through, but also that you are being properly rewarded for the time and effort you have put into building your business and brand.

What affects the value of a business?

There are a number of different factors that influence the value of your business, including external factors you have little control of, such as the current economic climate. Of course, one of the biggest influencers on the valuation of your business is your financial records. A strong financial history backed up by accurate accounts, which show positive cashflow projections, will make your business much more appealing to buyers. Another important factor that will have a big impact on your business’ valuation is the market your business is operating in; operating in a competitive marketplace that has reached saturation will inevitably devalue your business.

Tangible and intangible assets

Understanding the value of both intangible and tangible assets associated with your business is crucial to coming to a realistic overall valuation. Your tangible assets include all physical items your business owns, such as equipment and stock, as well as your office premises and number of customers or clients you have.

Intangible assets affecting the value of your business include trademarks, company reputation and potential for expansion and growth.

Valuing your business using assets

The asset approach to valuing your business is relatively simple but will often lead to the lowest value as it does not take into consideration the current state of the market, meaning that even if it’s a sellers’ market, your business will still be given the same value.

Asset valuation works by taking the value of all your tangible and intangible assets and, subtracting all liabilities such as debts and loans, you get what is called the Net Book Value (NBV).

Valuing your business using income

The income-based approach to valuing your business is one of the best ways to value your company if you have a strong record of profitability. This approach takes the normalized profit, profit discounting abnormal purchases such as large one-off sales but including any future investment lined up etc, and then, as industry standard, multiplies it by 3-4 times; for example, if your normalized tax-year profits are $150,000 and you choose a multiple of 3, then your business would be valued at $600,000.

However, what you multiply your profit by is in part affected by your industry, with innovative companies – such as tech start-ups – sometimes being valued at much, much more than their current profits.

Looking at comparables

One of the simpler ways to value a business is to look at what other similar companies have recently sold for. This method, although simplistic, gives a relatively accurate insight into the market appetite and the going rate of businesses within your industry.

Negotiations and relations

Before heading into sale negotiations, it’s a good idea to hire an accountant to go through your finances and financial projections to ensure they are as accurate as they can be; nothing will cause a sale to fall through faster than inaccurate accounts. It’s also highly recommended to employ a legal adviser who can make sure all documents related to the sale are accurate and that non-disclosure agreements are involved, which will protect details of your business’ finances leaking during and after negotiations.

The final agreement

As you approach the final agreement it’s important that all details from both parties are accurate, deadlines are agreed to, and that you feel truly happy with the value placed on your business. Remember that your business took a lot of courage, determination and hard work to turn it into a success – reward yourself by accepting a sale price that you feel truly confident and comfortable with.

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Chris Smith is an independent writer and blogger at Spend It Like Beckham. His blog mainly focuses on lifestyle and sports, and he’s had features about a variety of topics, including business, published on sites including the Huffington Post, Travel Blog, The Guardian and The Telegraph.