The method we recommend for business valuations is to appraise the business based on the return on investment (ROI%) on the particular business. We base the ROI% on both recent sales that we have made along with actual reported business sales data compiled from business brokers throughout Perth. It is calculated either as a return on investment to a single owner operator or to a business operating under full management (ie: where the new owner will not need to actively work in the business).
The ROI% range for a particular business will be based not just on the financial results but also on the intangibles (previously referred to as Goodwill). In our experience this is the most successful way for us take account of what can be vast differences between 2 supposedly identical businesses. It enables a buyer and their advisors and financiers to be comfortable that the business price is reasonable, while at the same time showing the owner why their business is valued at this level by the market.
There are many factors other than pure financial data that will affect the risk profile of each business and consequently their value. The most important factor to consider is the sustainability of the income or profits. So really, most factors that you would try to identify would be measured on whether they affect the sustainability of future profits negatively or positively and to what degree.
This probably sounds simple, I know, but it takes some work, it takes some experience and it means you have to take a position that you feel you can defend.
The factors that we consider include:
- Cashflow/Quality of debtor book. Who are the customers? What are terms of trade? Do they collect monies owed as agreed?
- Income risk. Is income contracted? Are margins secure?
- Working Capital requirements. Any stock requirements? Terms of trade from suppliers?
- Growth prospects. Is the business growing, stable or in decline? Is there anything unique about the business? Do they have new products/services?
- Competition. Where does this business sit it relation to competitors? Is the business at risk to competitors?
- Transition. Will the current owner stay on to ensure transition? Are supply agreements assignable? Will staff accept new owners?
- Barriers to entry. Is there a barrier to entry?
- Location or lease. Is the location suitable for a current business and for growth? If so is there a good lease available to a new owner?
- Capital Expenditure requirements. Is the Plant and Equipment current? Are there Capex requirements in the business?
- Concentration risk. Is there a good spread of clients? Does one client make up more than 20% of sales? Is the business at risk to any of its clients?
There will be more to look at obviously on specific businesses, but these are a good start on what you would need to take into account when setting a ROI% for your business.
IMPORTANT NOTE TO BUYERS REGARDING GOODWILL
Screwing every cent out of the transaction. Most purchasers focus is rightly on the final price that they pay for their target business. But how much of the goodwill you as the new owner are able to transition to the new entity is often reflected in how well you treat the outgoing owner. Many purchasers want to feel like they have a super bargain BUT remember the super bargain comes at the owner’s expense and as such offers them little motivation to go the extra mile and help you achieve a successful transition. The numbers only tell part of the story, often a large part of the intellectual property of a business sits between the owner’s ears and your ability to access it will be reflected in how well you treat the owner and whether the deal is fair to both parties.
Contact Martin Dabb on 0458 290 100 or complete the following Contact Form whenever you’re thinking of selling your business in Rockingham or Kwinana. We will provide you with a comprehensive free market appraisal of the market value of your business.