How to value a business?

[Roz]

Hi everyone,
I was wondering if anyone knows how to estimate the value of a business in a purchase? Eg. I had a shop I sold years ago and from memory the selling price was made up of: profit for one year + fixtures and fittings + stock. I am looking at buying a new business and was wondering if this was correct. The owners are trying to charge more than that.
Thanks

 

[Andrew]

I would think that fittings + fixtures + stock + 1 year's profit would be a bargain. Fittings and
fixtures depreciate a certain amount but you would retrieve the 1 year's profit in just 1 year.

This may be common however for a business where the owner is the shopkeeper/bookeeper/
manager/etc.

Return of capital after just one year in a business that I didn't have to be there to run
would seem extraordinarily good to me.

Warren Buffett uses a discounted cash flow model for valuing the businesses he buys. As
I understand it he discounts the free cash flow of a business by the long term treasury bond
rate and factors growth in to determine the value of a business, he also tries to buy at or
below book value.

andy

 

[DaleGG]

Hi

There is no accurate basis for valuing a business and each type of business will have a different formulae for the good will.

Any decent accountant can make a business look worthless, or a goldmine depending upon which side of the fence he/she sits.

I definitely agree with a formulae though of

Stock at value
Plant & Equipment at valuation

with good will to be negoitated depending upon factors such as:

how long the business has been at those premises
whether the good will relates to the people running it, or to the business itself. (for example, if one of the owners was a league star such as Alfie then he is a big part of the goodwill value rather than the business)
how the profit has been calculated

I would normally get the profit for the last three years of the business. Then, I work out the average profit. From this, I add back discretionary costs such as donations, owners wages, owners vehicle costs and sup etc. Then, I would deduct the reasonable costs of a managers wage, a car.

This is a reasonable "rule of thumb" although some business can be valued at 2 times profit, or even 3 times profit. And, some businesses again have other formulae for measuring the value.

I hope that this helps and good luck with your due dilligence.

Dale

 

[Roz]

Thanks Andrew, thanks Dale,
Very helpful info.
Thankyou, I really appreciate you taking the time to reply.
Roz

 

[Ruby]

This might help to give you an insight into the different ways they value businesses.

http://www.bsab.com.au/valuationseller.htm

Good luck!


Ruby

 

[Roz]

Thanks Ruby - great site!