Business Valuation methods.
- Countless variables affect a company’s value, such as the value and age of the company’s equipment, the expertise of its staff.
- Where the business is at in its life cycle and whether it’s located in a growing or shrinking market.
- Despite this fact, no matter what methods you use to work out a company’s value (see three options at right), the most important factors to take into account are the true operating costs and the total profits.
- “You’ve got to set aside your personal drawings and prepare your business,” says Noel Currie, Managing Director of Australian Business Sales Corporation Pty Limited. “You’ve got to identify where you spend your money and make sure it is spent for business purposes only, and record it.
- Once you’ve done that, maximizing that profitability figure is how you maximize the value of the business.
- “Noel believes it is vital to include a market-correct income for your own role, as opposed to the small or non-existing income you may be paying yourself.
- Once the accounts are properly reflective of the company’s real world cash flow then the value of the business is all about return on capital.
- “If you’ve got a lot of expensive stock and equipment then the return could be quite low,” Noel says.
- “There may not even be room for goodwill because you have to put all of your capitol into assets to make the business function correctly.
- “Think about leasing updated equipment and identify issues where capitol is being wasted, such as overstock of products, outdated technology, expensive or unsuitable office or warehouse space and even under performing staff.
- “Whether it’s for an outright sale, partnership buy-out, liquidation, re-financing or dissolution, as strange as it may seem, the value of the company will change with the purpose of the valuation,” Noel says. “
- There are plenty of formulas and Methodologies, but at the end of the day it’s all about the profitability.”
Some Methods used to value businesses.
- Here are three basic methods of business valuations, as outlined by the Canberra Business Advisory Service.
The Profit Valuation Method.
- For a broad estimate, multiply the net profit before tax by a given factor. For example, a newsagency – traditionally a very secure business – may be worth three times net profit.
- Restaurants, seen as less secure, may sell at only two times net profit. Never regard this as anything more than a ball-park indication of the true value.
Discounted Cash Flow Method.
- This method takes future cash flows and projections into account and is mainly used in feasibility studies.
- To compare cash flows from different points in time, it’s necessary to discount them to their present value – in other words, restating all future cash flows, as opposed to profits, as if they were received, or spent, today.
- You should seek the assistance of an experienced accountant to determine future cash flows.
The Asset Valuation Method.
- This involves assessing the value of the assets, including equipment, all furnishings and stock. Sometimes the business will be worth more than the value of its assets:
- – This difference is known as ‘goodwill’ which includes reputation, the hard work the owner has put in and a premium for future earning capacities.
- Therefore, Value of Business = Net Tangible Assets + Goodwill.
- So if you’re thinking of selling your business or need advice on Marketing and selling your business please call Australian Business sales Corporation on 1300 722 556 and speak to one of their experienced business specialists for a confidential discussion.
Phone Now 1300 722 556