By Colin Mills, CEO of The FD Centre

The most important factor in understanding the value of a business is accepting that it is only worth what some else is willing and able to pay for it. It is very easy for business owners to get carried away with theoretical valuations without considering what valuation a buyer will place on the business.

Businesses will broadly fall into 3 categories:

1. Cash flow / Asset based businesses

2. Strategic Purchases

3. An Intellectual Property exploitation

A Cash flow / Asset based business can be in any sector and is generally operating in a mature market and reliably generates good profits and generates cash. The important consideration in these instances is that a bank will be lending the prospective purchaser of the business the vast majority of the money to buy the business. The prospective purchaser will need to demonstrate that he can repay these loans over a relatively short time frame in much the same way as one repays the mortgage on a house. Typically values of 3-5 times the predictable earnings stream are not unusual and the bank is looking for a strong asset base at the business and /or a 3-5 year repayment plan.

A Strategic Business is typically a business that will be bought by a much larger organisation because the activities are a key strategic fit for that business. As a result, these buyers will typically pay more than the financial based buyers above provided they are competing to purchase the business.

An intellectual Property exploitation is notoriously difficult to value and varies significantly from sector to sector. For example a pharmaceutical business that has an invented and patented a breakthrough drug that will cure a common and as yet uncured disease. As the distribution channels are well understood, this business will attract a high price.

Colin Mills is the Chief Executive Officer of The FD Centre Limited, the longest established and fastest growing provider of part-time Financial Directors. The FD Centre has also recently merged with FDUK to create the largest team of part-time FD's in the UK - Visit www.thefdcentre.co.uk to find out more

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