“How much is my business worth?” It’s a question every business owner asks at some point. The short answer? Your business is worth as much as a buyer is willing to pay for it. But let’s unpack that because there’s a lot more to it than meets the eye.
When someone says “worth,” they’re usually referring to a fair estimate of value. That’s where valuation methodologies come into play. If you’re considering selling your business, raising investment, or simply want to understand your position, knowing what your business is worth is invaluable.
Business valuation can be approached in two key ways, using an intrinsic or extrinsic valuation. Intrinsic valuation focuses on a business’s internal financial performance and future cash flows, while extrinsic valuation relies on external market comparisons, such as similar transactions and publicly traded company benchmarks.
- Intrinsic Valuation
This approach looks at your business from within—focusing on its cash flow, financial performance, and growth potential. Two main methods fall under intrinsic valuation:
- Discounted Cash Flow (DCF): This method estimates the present value of your business by forecasting its future cash flows and “discounting” them back to today’s value. Essentially, it answers: How much are my future earnings worth right now?
- Leveraged Buyout (LBO) Model: This approach is often used by private equity buyers. It looks at how much they can pay for your business while still hitting their return-on-investment targets.
If your business has strong financials, consistent growth, and clear future earnings, intrinsic valuation can paint an impressive picture. But remember, this is more about what the business is inherently worth rather than what someone might pay in the market.
- Extrinsic Valuation
Extrinsic valuation is about comparing your business to the market—looking at external benchmarks to see what other similar businesses have sold for. There are two primary methods:
- Precedent Transactions: Here, you look at actual sales of businesses like yours. If a similar company sold for 6x its earnings, it’s a fair assumption that yours could sell for something comparable.
- Quoted Comparables: If there are publicly traded companies in your industry, their market value (or valuation multiples) can be a useful benchmark, albeit quoted companies often attract a slight premium due to their relative scale, access to finance and liquidity
The beauty of extrinsic valuation is that it considers market sentiment and external demand, which often have a big impact on price.
A Comprehensive View: Use Both Approaches
A good advisor will use a combination of methodologies to give you a well-rounded view of what your business is likely worth. They’ll combine the cold, hard numbers of intrinsic valuation with the market-driven insights of extrinsic valuation. This ensures the valuation isn’t just theoretical—it’s practical and aligned with what buyers are willing to pay.
Final Thoughts
Even if you’re not planning to sell right now, understanding your business’s value can help you make strategic decisions about growth, investment, and planning for the future—whether that’s succession or an eventual exit.
Your business’s value isn’t fixed; it’s shaped by financial performance, market dynamics, and the strategy behind the sale. With a proven track record of delivering successful transactions, deep market knowledge, and a focus on maximising value for clients, Springboard can provide a clear understanding of your business’s worth today—and help unlock its full potential with the right approach.