A true value is that agreed between a willing buyer and seller. A different buyer and seller with the same product may agree a differing value.
Particularly in the SME (Smal Medium Enterprise) area, valuing your business can be difficult, as for the vendor the value of the heart and soul they have put into the business does not always equal the value seen by the buyer.
The reason for selling comes into play. Have you grown the business to the point where you need help or just desire an exit? Is it due to a partnership or marital split? Is there a timeline involved?
The three main bases of valuation are asset based, market based and earnings based. Normally at least two of these are applied to verify your answer. Asset based valuation is set around a fair value for the tangible and intangible assets. Market base looks at similar businesses for sale or sold. Earnings base valuation applies a multiplier to the discretionary business earnings. Discretionary earnings are the cash flow generated after paying normal operating expenses which is available for owner remuneration, debt servicing or retention.
To accurately do your valuation you will need an understanding of the industry, it’s current market trends and any risks the business faces regarding key staff, technology, and legislation changes. Is the business operating in a competitive market? Is it a dominant player in the market? Is the value of the business tied up in tangible assets such as plant and stock or intangibles such as contracts, intellectual property and databases? Particularly with intangibles, how transferrable are they?
Finally, ask yourself the question “What would I pay?”. Valuations are only opinions, albeit based on specific criteria and history. So, we come back to the opening statement. An arm’s length sale between a willing seller and buyer is the true value.
Call Wayne on 027 498 3312 to talk about anything commercial.
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