Valuing shares in a small business

[sjj84]

Are there any guides for valuing shares in a small business? Looking to the future and a possible opportunity to buy into a company, but no idea if it's actually going to be affordable.

[trickywoo]

You can get into the X times profit thing but essentially it’ll come down to what one party is happy selling for and what the other will pay.

I’ve done this and wouldn’t do it again. Even in a 50/50 situation or 60/40 in your favour the other party can make your life quite unpleasant.

If you do it be absolutely clear about exit arrangements in the future. In writing of course.

[StevieBee]

If you're looking simply to invest then only you can determine the risk and affordability.

If you're buying in with the intention of taking a controlling stake, then as trickywoo says, it's fraught with many issues.

For a start, there isn't really any cast-iron formula for valuation in a small business. It's more likely to be a case of the company acquiring the cash that needed to invest in the growth of the company. So 'what's needed' rather than 'what it's worth'.

If this is the route you are going, then you need a cast iron shareholders agreement in place before parting with your hard-earned.

[sjj84]

Should have put a bit more detail in the opening thread really. It's a non trading company, simply owns a building that is leased out. Currently a 40/40/20 split, there's a possibility that one of the 40 might become available in the future.

[Deesee]

sjj84 said:

Should have put a bit more detail in the opening thread really. It's a non trading company, simply owns a building that is leased out. Currently a 40/40/20 split, there's a possibility that one of the 40 might become available in the future.

Any Debt/s attached?

Length of Lease?

Terms of Lease?

Quality of Tenant, (Joe Bloggs Plumbers or John Lewis)?

I won't go on to far, but these are the minimum points you should be looking at.

A commercial valuer should be able to give you a Market Value, a Market Value for sale (180 days), as well as a current investment value.

Buying shares in a LTD company also has its potential ups and downs, but I'm sure your accountant can give you a steer on that.

[sjj84]

No debts that i know of, premised owned outright. 5 years left of a 15 year lease, no reason to think they'll leave but obviously no guarantee of that. Currently a large nationwide company.

[CubanPete]

Surely the value of the company is the value of the property with a Tennant, minus a bit as it isn't liquid.

A property agent will be able to advise.

[Aquarius909]

Starting with a multiple of earnings (3-5x I would say but it depends on the sector and growth potential) is a good place but you have to look at those earrings and see how they are being generated and if you can continue this as a new owner.

Specifically if most of the business is due to the current owners' established personal connections then you have to bear in mind that if these owners are taken out of the business it may earn substantially less. In this case 1x earnings may be too much.