When selling a business, one of the most crucial elements to consider is the business’ value. It is essential to derive an estimated valuation of your business early on so you are clear about your expectations and your willingness to negotiate during the sale of your business. There are a number of key factors which will affect the value of your business, just as there are a variety of ways in which value can be calculated.Key Factors that Affect the Valuation of Your Business- Finance – The business’ financial history and current situation will be vital to the overall value, as well as the cash flow and projected profits. Many buyers will be interested in how well the costs have been controlled, and if there will be a need for capital expenditure in the future.- Assets and Liabilities – The value of the business’ assets such as property, stock, equipment, and accounts receivable is another key factor. In contrast, any existing liabilities and level of debt will also need to be taken into account.- External Factors – The general state of the economy will affect the level of demand for your business, such as interest rate levels and inflation rate. You should research the value of similar businesses, the saturation of your market and the number of potential purchasers that may be interested.- Intangibles – Intangibles such as the potential growth of your business, the strength of your customer relationships and intellectual property and goodwill can also affect the final valuation.- People – How dependent your business is on your own involvement will be one factor that buyers will want to gain a clear understanding of, as if your role is paramount, the value may be depreciated as a result of your exit. The success history of the management and the staff commitment and experience should also be considered.Although many of these factors will be outside of your control, you can take steps and implement any necessary changes before the sale of your business, to make it as valuable as possible. The further in advance you begin to plan, the better prepared you will be for selling your business.It is important to remember that the valuation that you or your personal advisors may produce will most likely be subjective. Many business owners place a value on their business that is too high, and ultimately the business is only worth what a purchaser is willing to pay.Methods of Valuing Your BusinessThere are different methods available to you in order to determine the potential value of your business. The most common methods are valuations of the capitalization of future cash flow and multiples of future earnings.- Multiple of Earnings – Businesses that have a record of sustained profits are normally valued by a multiple of future earnings. Profits are adjusted for one-off or uncommon items, and then an estimate of the average earnings will be made. The multiple is a factor that will vary among different industries.- Discounted Cash flow – Many businesses are valued in a similar way as the multiple of earnings method, but this valuation is based on the estimation and discount of any future cash flow. Short term cash flow will be valued higher than long term cash flow.- Asset Valuation – Asset valuation is another method that is used for stable businesses with significant tangible assets. This method is based on the value of the verified assets identified in the business accounts.Being familiar with the business valuation process will almost certainly save you thousands of dollars when it comes time to sell your business.