When potential investors are considering whether to invest in your business they will need to know what it's worth.
How a business can be valued
There are various ways for private equity businesses to establish the value of your business to them. They may calculate the value of the company in comparison with the values of similar companies quoted on the stock market. This involves establishing the price/earnings ratio for your business.
Alternatively, they may calculate a value for your company that will give them their required rate of return over the period they anticipate being shareholders. For more information, download private equity guidance from the British Private Equity & Venture Capital Association (BVCA) (PDF, 1.11MB).
Another method of valuing your business is based on calculating the value of your assets. There are two types of business assets - tangible and intangible, and you need to include both in your valuation.
Tangible assets are physical, material and financial resources, such as plant, machinery and office equipment. Intangible assets are valuable resources that may not have a physical presence, such as brand value, skills and know-how and trade secrets.
For more information, see business assets.
Discounted cashflow anaylsis
You can also value your business by using discounted cashflow (DCF) analysis. DCF valuation is based on using projected future cashflows to calculate how much your business is worth - see value and market your business for sale.
Potential investors will also want to see how the value of your business is likely to change over time. Milestones, which are markers of how your business is developing, provide one measure of this.
Investors will be interested in the milestones that you have already achieved and the future milestones that your business must reach to be successful.