Business valuation

What valuation is about

Business valuation determines a price range for a company. It delivers not an exact value but a range derived from several methods. The occasion decides the method: for a sale the future earnings matter, for a tax question another method may be prescribed, and in a dispute it is about compensation rather than market price.

Which methods are used

Three methods are common. The earnings value method discounts future surpluses to today's value. It assumes that a euro tomorrow is worth less than a euro today. It is the most precise method and the most laborious, because it needs assumptions about the future.

The multiple method is the simplified variant. An earnings figure is multiplied by a factor taken from comparable cases. The formula is simple; the craft lies in choosing the factor, and that is exactly where most disputes arise. The asset value method looks at what is in the business, meaning fixed assets, stock and cash, less debts. For an online shop it is of little use, because it owns few tangible assets and its value lies in recurring business.

What lifts the value

• Recurring contribution margin: customers who buy regularly are worth more than customers from a single campaign. The question is how much of the result arises without new advertising.
• Freedom from individuals: when the owner is no longer needed, the value rises. Where knowledge sits in one head only, it falls.
• Documented processes: anyone who has described procurement, service and campaigns makes the handover easier and therefore the purchase safer.
• Channel spread: a shop depending on one marketplace or one ad platform carries a higher risk than one with several sources.
• Clean figures: bookkeeping showing contribution margins per item and customer is more solid than one showing revenue only.

What lowers the value

Four points pull it down. First revenue concentration: a single item or customer accounts for a large share, which counts as risk. Second legacy burdens from labelling duties or taxes, because claims can follow. Third technical debt, such as an outdated shop system without integration. Fourth the state of the assortment: a stock of slow sellers is capitalised air, because it has to be written down.

The question that moves the price most

More important than any method is the question of how much of the result remains without the owner and without new advertising. That figure separates a business from a self employed job. It can be calculated by looking at the customers who bought again in the last year and comparing their contribution margin with the overall result.

Frequent questions

• Is there a standard factor? No. The factor follows from industry, size and quality of the profit.
• Do I value it myself or have it valued? In a sale an independent valuation on both sides is common.
• Does stock count? Yes, but with a discount for goods that are hard to sell.