Valuing a business: the components that form a business’ overall value

Business value is an informal term that describes the value that defines the well-being and overall health of a business in the long run. Business value is primarily made up of the goodwill in the business, alongside the plant and equipment value and the stock in trade. However, there is less obvious intellectual property as well which we will share with you in this article.

Patents

Although there is not a set price for obtaining patent, it definitely influences your business value. Setting a price on a patent is not straight forward at all. There are different types of patent which should all be valued differently. Take for example a technology patent that has no commercial value versus a high commercial physical product. Besides that, the process of obtaining the patents pending are long and depending on where in the process you are, the value might fluctuate.

Trademarks

With a trademark a product or service distinguishes from competitors. A trademark valuation is based on a combination of market, cost approaches and income. Especially intangible business adopts widely accepted approaches. If you are looking into buying or selling a business, a thorough valuation on its trademarks is highly recommended to get to a fair business value.

Brands

Branding might be the most important vehicle for business growth. A strong brand is designed to get more customers, to sell more products and/or services and help to speed up the purchasing process. There are formulas to calculate a brand’s equity and this should be specified when valuing a business.

The formula for valuing a business

Business value is a cocktail of all the above ingredients and it is these ingredients which make the profit on which the business value is based. The profit of the business is usually ‘multiplied’ by an accepted multiple for the industry and based on comparable sales evidence of similar businesses (type, size and industry within the same marketplace). However, business value is not that simple. It can also be affected by individual strengths and weaknesses associated with the business in question and also macroeconomic forces such as Government policy changes or the Global financial crisis.

Examples of how business value can be affected

Take a look at what has happened to the value of insulation businesses in 2009 and 2010. In 2008, the value of insulation businesses was skyrocketing but in 2010 it was plummeting… all due to external influences on a previously stable business sector!

More about GMO: WA’s preferred business broker

GMO business brokers offers outstanding buying and selling service in Western Australia. If you are looking to buy or sell a small to medium size business in Perth or elsewhere in Western Australia, you will find a reliable partner in us. At GMO there are 18 business brokers at your service, all with their own specialty. Our track record shows 3500 successful sales so far. If you’re looking into buying a business we strongly recommend to look through our businesses for sale in Perth and beyond. If you are looking into selling a business in WA, please contact us so we can help you to maximize your results.

If you are looking into valuing a business, contact the office on (08) 9481 4422. One of our friendly and knowledgeable team will be more than happy to discuss your industry and the potential value of your business.

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Whether you dream of buying a business, want to sell your Perth or WA business, or want to know the value of your company – GMO’s business brokers and valuers are here to assist you. We have won the City of Perth Award for Business Excellence and our Managing Director has been elected as a fellow of the Australian Institute of Business Brokers. Whether you are a buyer or a seller, GMO can introduce you to the right person.

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