Today I talk about how a business gets valued and the main factor that determines the difference between a £50k business and a £1M business.

I hope you are having a great day. It’s been a week since I filmed my last video and I had a bit of eye infections. So I decide to not horrify you with my ghastly appearance, but it’s all going back to normal now, so that’s great. So today’s video I thought I’ll take a break from the usual tax stuff. To be fair, most people are forcing me to take a break because as valuable as tax videos are there’s areas we can add a lot more value through this content. So if you were following my six-part series on how to get paid through your company, I’m just taking a little break from that. I will go back to it, but I want to make sure we got a good balance between tax and business growth and business development stuff.

So today’s video, I just want to give you a bit of an overview of what a business is worth. Obviously this is quite a complex area and there’s lots of factors, but I’m going to give you a really quick overview. I’ll try and keep this video under seven minutes if I can… Well let’s say for five minutes and then what I do is I’ll do some follow-up videos that sort of expand and explore on some of the things we’re talking about. So from a financial point of view, when you value a business, there is three components to it, really. Okay, so a business has its assets. So let’s say you’ve got a premises, you’ve probably got shelving. You’ve probably got other equipment in the office that has a physical value. A business also has what you call working capital. So not just working capital, but current assets.

So things like stock, other consumables that are used in delivering that product or service. But then the third one is a business essentially has Goodwill. And usually there’s not a lot you can do around the value of your assets or the value of your stock, assuming you run your business efficiently, then that’s going to be predetermined and to some extent outside of your immediate control. So the one thing that you can impact is the Goodwill people are willing to pay when they buy your business. So goodwill is like a whole video set on its own. But what Goodwill essentially is, is essentially the amount of money people are willing to pay you for your brand and your connections. So there are quite a few factors that go into determining what your Goodwill is worth, and also actually, it’s also what people are willing to pay you for the processes in your business as well.

So if you’ve built the kind of business that is easy to run, that pretty much runs without you, that has a great team who are really committed to the business. Plus you’ve got really, really good clients and you’re not overly reliant on one client and then on top of that, you’ve got a really good brand and a really good product with really good margins, then that’s what people are going to pay for. And to put it into perspective, right, if your me-too kind of business, a business that doesn’t really differentiate, business that doesn’t have a USP, a unique selling point, and doesn’t have a really defined target market, it might sell for two times its annual profit. So let’s say, you do the graph, you get your profit up to about 50k a year, then you’ll be lucky to get a 100k for that business.

Obviously you’ve got to factor in a few other things, like if you are… Well, mainly if you are working in it as well, that’s going to have a big impact because a lot of the time you got to factor in the cost of replacing you when you are working out what the profit of your business really is, your underlying profit. But a business that has all the other components, a good brand, a well-defined target market, good product and a good customer base plus good processes, that can sell in certain circumstances up to 40 times its net profit, sorry, it’s adjusted profit. Well, in general, businesses that are worth 40 times that profit tend not to have a profit of £50,000 anyway because the process is so good.

The profit is in the tens of millions. But there’s this multiple that determines what people are willing to pay for the Goodwill in your business. And that multiple is determined by quite a few things, as I mentioned. So what I’m going to do is in future videos, I’ll go into the individual things that determine that multiple and then explain how they can be improved. But just give you an overview, so the key thing you’re trying to do when you’re trying to sell a business is you’re trying to get as much money as you can for that Goodwill. So what we’ve actually done is we’ve created a course, it’s called Apex. So what we do is we support business owners to take their business from earning £50,000 a year and only being worth 50 to a 100,000, to putting the processes and branding, the structure of a place to be actually worth a million pounds when they want to sell it.

Sometimes they don’t want to sell it because, you know what, if your business is worth a million pounds, it’s probably quite a good business set and it’s easy enough to run without having to put loads and loads of effort into it. You can build a business to sell without actually having to sell it or wanting to sell it. So it’s just something to factor in. So if you want to find out more about our signature program Apex, and if you want to understand how an accountant can actually help you get your business to a point where it’s worth a million pounds, then get in touch and book yourself in for a free strategy session. And also just keep watching this video series, because I’ll be releasing more useful stuff on tax, more general business stuff and more stuff about the valuation and improving valuation of your business. Have a great day and I will see you soon.

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