How to value your business depends on many factors. Valuers look at Industry profit multiples to establish Business worth. i.e., the net profit multiplied by the years to recover. For example, you may have a coffee shop which has an annual net profit $200,000 per annum, and the average Industry Price earnings ratio for that type of cafe Business is a multiple of two to one. Based on that the valuation and estimated selling price would be $400,000.

Please note this is general and varies from industry to industry, size of the company, individual sector, etc. For example, a similar sized and quality of restaurant or cafe may have similar annual profits. For example, so they both make a profit of $300,000 a year. The general market price for that style of cafe or restaurant may be a multiple of 2-to-1, i.e., worth $600,000. You may also have a similar type of restaurant or cafe and a recognised franchise Group such as Starbucks or Coffee club. This may have a general market value of 4-to-1 because it may be more proven more time-tested business model systems. In this case, the market value would be using this in this ratio be $1,200,000. ($300,000 x 4).

Trying to work out what how to value a business and its worth in the current market can be a bit of a challenge times. There are many factors to consider. In addition the estimated value between what the buyer thinks its worth what the seller thinks its worth varies 99% of the time.

Factors to consider.

 

Assets Valuation.

The general condition of the business assets and the quality depreciable value of the furniture, fittings & equipment (FFE). Do we have to factor in replacement of some or all of these assets in a few years time?

Lease Contract.

The length of the lease term and the rental amount. How does the rent compare to the market value for the area? Are there many vacancies of a similar type of property in the surrounding area. Is the area growing or changing demographically. Does it have a demolition clause? What are the rent increases?

Building Assets

What is the general quality of the building assets? Does it fit in with your expected clientele? Is it appealing? Is it in urgent need of a facelift. Does it look tired? What do you believe is the current owner’s attitude towards property maintenance. Are there plans to redevelop? Is there a demolition clause in the lease contract?

Goodwill value.

Do they currently have a good size quality customer database? Are the current customers likely to remain loyal to the business? Does the business have only a few very high-value customers? What would happen if you lose these a few of these high value large key clients? Is the customer list current?

Potential growth in business.

Have you done a feasibility study? Do you see future growth? Do you have the management skills and resources to fully take advantage of this ?untapped? growth?

Business Systems

?Are there efficient management systems in place. Do you need any special skills not freely available? Does the business rely on one or two key personnel? Can you easily replace them if they leave? Can you automate some of the items? Are the vendors giving you enough training time after the sale to assure a smooth transition to your ownership?

Accounts.

Does the business have a reliable set of books to verify the sales and profit declared? Is the business profitable? Most buyers, accountants, and bank managers would usually expect at least the last three years training and tax accounts.

What are the reasons for the sale?

A forced sale is likely to result in the lower price. Often businesses have to sell on urgent basis for various reasons such as illness or family disputes. This often results in lower selling prices compare to the situation where the seller is well-prepared and willing to take the time to find the right price.

Years of the business has been running.

The longer the business has been running, the longer the loyalty of customers and the consistency of cash flow over an extended period the higher price. Many businesses with good cash flow which have been open for the short time sell for lower multiples then long-established businesses.

Industry average prices.

Different industries can have a different price to earning ratios. All things being even how does this business compare to similar quality and size businesses around. Do you have access to recent comparable sales?

Entry cost valuation.

Many buyers out are looking at the options on whether to purchase an existing fully equipped business or to just lease premises and fit out to their specifications. If your established business is well equipped and a therefore good fit to the requirements they are more likely to pay a high price that if it needed a total refurbishment.

The possibility of purchasing the Premises with the business.

Is the current landlord willing to give you first option to buy the building if and when it comes onto the market? In addition we have seen situations where property owners/lessors have sold the property without the current lessee knowing. All goodwill will therefore likely to disappear if the current Business owners lease is close to expiry. In this situation, the business is worth what the recoverable equipment can be sold. Not a good position to be.

Freehold Commercial Property with Business

Buying the actual property with the business is a little bit more complex. Usually, have to add estimate the value of the commercial property/building to the estimated value of the business. Things can be even more complicated when you have a property worth a lot more in a situation. Such as being a potential redevelopment site. In that scenario, it is the highest and best use of the property plus the value of the business. For example you may estimate the market value of the highest and best use of a building without a business to be $2,000,000 and have a seperate estimate of the business sale price estimate of say $400,000. In this situation the total estimate would be $2,400,000 ie $2,000,000 (freehold property) plus $400,000 (business estimate).

In Conclusion

Taking all these factors into account what is the market value of the business. Accountants who had experience in the particular industry are usually a good source. It depends on which accountant you ask. The buyers or the sellers. Over the years I’ve found that the potential buyer’s accountants estimate very substantially from the seller’s accountants estimate of market value. In most cases it may be better to get an independent valuation from a valuer with the valuation experience in the business you are looking to buy. It could be best to think of it this way. Most of all, the buyer has to satisfy their bank manager.