Valuing a business is much more of an art form than a science, simply because value, like beauty is in the eye of the beholder.
A business that has immense value to one potential buyer may have very little value, or attraction, to another.
Your business manufactures and sells blue widgets. Your competition only has yellow widgets.
If the prospective buyer doesn’t care what colour the widget is, the two businesses can be directly compared, but if the buyer only wants blue widgets, your business is worth far more than the manufacturer of yellow widgets!
The over-riding principle is that in 90% of cases a business is bought for the future profits it will make, and the valuation calculation is an attempt to place a value on those future profits.
The other 10% of business purchases are for bought for lifestyle choices, a passion or an interest (think football clubs) or for egotistical purposes.
There are many different technical tools and calculations used to try and estimate value, but the real challenge is to identify the right strategic buyer and see the business from their perspective.
