There are various factors influencing business value but before discussing them you need to understand that there are various categories of businesses in Australia classified according to their size. The classifications are:
- public companies
- privately held and family small to medium enterprisesÂ
- micro businesses
Some of the basic factors influencing business values include:
PROFIT HISTORY:Â The value of a business highly depends upon the profit it makes. Not only from the current time but also from the past history.
THE ACCURACY OFÂ BOOKKEEPING AND RECORDS:Â All the bookkeeping and records of the business need to be accurate.
MARKET DEMAND:Â If the market demand for your business is high then the value of your business goes up.
CASH FLOW:Â Another factor affecting value of your business is cash flow. Cash flow is the net money left in the business and is distinguished from profit. You can be making great profit but if your clients don’t pay their bills you could be having negative cash flow in the business.
STRATEGIC VALUE:Â Strategic value is where a buyer gains more from buying your business than just the profit. The two businesses together create extra value. This could be by virtue of the buyer gaining a key employee from the purchase, securing a key product that it can sell to its database or some other benefit of the transaction.
ECONOMIC CONDITIONS:Â The next factor is the economic conditions generally. The better the economy the higher the price.
THE VALUE OF ASSETS:Â The next factor influencing the value of business is the value of the assets. See elsewhere on this blog our post on Asset Valuation Method.
FUTURE EARNINGS AND PROFIT POTENTIAL:Â Just remember that a buyer will value your business according to their belief about the size of next year’s income.