What are the different accounting methods that are used to value a company?

There are a number of methods you can use to value your business:

1. Multiple of profits

Average monthly/annual profits are adjusted to not include one-off factors like exceptional costs, one-off purchase. This will give you a good indication of immediate future profits. You’ll then need to add on any additional costs or gains that the company may make after being sold or invested in. This final profit figure is generally called ‘normalised’ profits.

To find a suitable valuation for your company, multiply this figure by anything between 3 and 5 times (this is the norm). Be careful not to overvalue your company at this point – smaller businesses should be at the lower end of this scale whilst most larger companies with a strong reputation can be towards 8 times.

This method is generally used by businesses with a track record of profitability.

“Price is what you pay. Value is what you get.” Warren Buffett

2. Asset valuation

Your accounts will show the net-book value of your business. That is total assets minus total liabilities. The values in your books may not take into account inflation, depreciation or appreciation – make sure your assets are valued at the current rate.

3. Entry valuation

How much would it cost to build assets, people, training, building up a customer base and developing products and services.

4. Discounted cash flow

This method uses estimates of future cash flow to value your business. If you’re predicting future cash flow, make sure you take into account rates of inflation. Many business buyers will use a discount rate of 15-25% to take into account changes in inflation.

If your business has stable, predictable cash flows this is probably the best method to use.

5. Rule of thumb

Different industries have their own rules of thumb that can be used to determine your businesses value. For example, retail companies are generally valued as a multiple of turnover, number of customers or number of outlets.

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