How to best value a business for purchase...

[watto]

Hi all,

Just after some general input as to the best methods to use to value a vending machine type of business.

At what rate does plant and equipment depreciate? Is 20% per annum for 5 years?

If an asset is purchased on the 30th June is the full value of depreciation claimed for the whole year?

Cheers
watto

 

[Belu]

Watto,

The cost of the business depends on a lot of factors. Is it running at a profit? What are the expenses like? Will you need a lot of insurance? Where are the machines located? Do they get damaged a lot?

Figures:

What is the ROI you want? What is the risk factor? What about the opportunity cost? Eg: if you can get 7% p/a ROI on a property (in CG) and have neutral cash flow from it, then you would want more than 7% from this business year on year. Add in a risk factor of say 5% and you now need 12%.

Look at the economy. As people start pinching pennies will they still purchase snacks/drinks from vending machines? Or buy things from the supermarket?

With regards to depn it is like a house, you can only claim the portion in that year, so 1/365 for the year's depn in that case.

Is this post/question more of a "I am just mulling it over" type thing or a "I am heavily doing some research and about to buy" venture?

Getting the value from a business can be a very complex thing, and something you should talk to an accountant who specialises in the field. It can be something like 5-7 times the EBITA (established manufacturing businesses for example) or 80% of yearly revenue (an example is a hosting business) so you can see methods vary a lot.

Cheers

Ben

P.S The above advice is of a general nature and is not expected to be relied upon.

 

[Sunfish]

A vending business needs to be mature. Don't touch newly installed machines with a barge pole.

They can be very good businesses to be in though. PM me some details and I may be able to help.

 

[PrimeCommercial]

How many years gross profit is the vendor asking for?
Different businesses have different ways of valueing them but in the end your buying an income so this is one important figure you should be looking at.
If they have priced it at 1 years gross it may be good value, if its priced at 5 times gross it may be quite dear.

 

[evand]

Mostly look at the net figure when valuing a business. A business might have $1m gross on 5% net profit and you' only be making $50k. Not good.

Most small businesses value between 1 and 2 times net profit (what you stick in your pocket at the end of the year) which means you will get your money back in one to two years.

With vending a a large percentage of the purchase price of the business would be the depreciated value machinery and possibly stock at value.

With vending the position of the machines is paramount, everyone is fighting for the best positions and if your machines have average ones your numbers will suffer.

Mostly the premium possies are gone. Obviously, Sunfish is the man to talk to.

 

[Sunfish]

At what rate does plant and equipment depreciate? Is 20% per annum for 5 years?

I still operate stuff I bought second-hand >10 years ago.

I have no idea of the type of equipment you are looking at, but I would value my long established operation at about 2 years gross which also approximates the value of the gear plus some good-will to allow for the fact that it is installed. That good-will is far too low in my opinion so you are better off buying out an existing operator who has already done a lot of hard work, than re-inventing the wheel.

If you were to buy a lot of new gear you would have to decide not to eat for four years while you pay of the leases and would find the sale price at that time less than your purchase price anyway.

It ain't as easy as it looks, but once established, ain't a bad long term biz either.

 

[Belu]

Depreciation for tax purposes and life of assets are two seperate things as well.

If the ATO says to depn over 5 years at straight line method (i.e 20% pa) that doesnt mean you cannot still use them after 5 years.

 

[watto]

Thanks for all the input guys....

In the process of examining machine turnovers and expenses.

Their accountant has valued the biz at 2 years net profit with current years depeciation added back plus plant and equipment.

He doesnt appear to have taken depreciation into account for the older equipment and is just using an asset register which shows original cost price for equipment.

The biz has been expanding for the past 4 years with a lot of growth in past 12 months.