business valuations
Discussion
Now im sure there was someone on here that did this kind of thing for a living...
There is a business we know of which is related to my mates line of business. the owners have mentioned they are looking to retire and sell things on. At this point we pricked our ears up as it would be a good fit with my mates business. But i was wondering if someone could give me some pointers on how you value a buisness before we go ay further... if the basic summs look reasonable then we would be looking for a propper proffessional valuation after that
Cheers
Graham
There is a business we know of which is related to my mates line of business. the owners have mentioned they are looking to retire and sell things on. At this point we pricked our ears up as it would be a good fit with my mates business. But i was wondering if someone could give me some pointers on how you value a buisness before we go ay further... if the basic summs look reasonable then we would be looking for a propper proffessional valuation after that
Cheers
Graham
Thought as a rule of thumb it was something like 3 times gross profit plus assetts.
i.e if a company make 100k per annum & ownes offices worth £200k then as a company its worth £500k.
Obviously it ain't that easy as a lot of other things come into play, but it gives you an idea.
As with anything in life, its only worth what someone is willing to pay for it.
i.e if a company make 100k per annum & ownes offices worth £200k then as a company its worth £500k.
Obviously it ain't that easy as a lot of other things come into play, but it gives you an idea.
As with anything in life, its only worth what someone is willing to pay for it.
I was always lead to believe that the starting point for valuation was GP x 6.
Having recently embarked upon a similar thing, it comes down to how anything is valued - a compromise between what the seller is willing to accept and what the buyer is willing to pay.
If the company is making stuff, has plant, regular customers, etc, the process is easy (ier). If it's a service company then this is where the fun starts!
Having recently embarked upon a similar thing, it comes down to how anything is valued - a compromise between what the seller is willing to accept and what the buyer is willing to pay.
If the company is making stuff, has plant, regular customers, etc, the process is easy (ier). If it's a service company then this is where the fun starts!
the percieved value will differ from person to person, ie it may be worth more to one person than another...
things to consider would be consistancy of profits and turnover and the likelyhood of customers leaving if ownership changes.
if the company had filed accounts then the value of total assets less liabilites would be a low starting point... the premium on top of this would depend on many factors
things to consider would be consistancy of profits and turnover and the likelyhood of customers leaving if ownership changes.
if the company had filed accounts then the value of total assets less liabilites would be a low starting point... the premium on top of this would depend on many factors
jay123 said:
the percieved value will differ from person to person, ie it may be worth more to one person than another...
things to consider would be consistancy of profits and turnover and the likelyhood of customers leaving if ownership changes.
if the company had filed accounts then the value of total assets less liabilites would be a low starting point... the premium on top of this would depend on many factors
things to consider would be consistancy of profits and turnover and the likelyhood of customers leaving if ownership changes.
if the company had filed accounts then the value of total assets less liabilites would be a low starting point... the premium on top of this would depend on many factors
Exactly. There is a simple and valid rule:
Something is only worth what someone is willing to pay for it.
All the rest of the valuations are only to convince the buyer of the latter.
At a minimum cost you are looking at the value of the assets and what they would be sold for under the same rule. NOT what the asset schedule says they are worth for tax reasons.
Something also to think of is whether you are looking for the long or short term. If the latter it is how quickly you can inrease the perceived value in X years time over what you buy it for. If it is the long term work out the amount of time you will have to put in to get a realistic annual profit. From there work out what you think the 'payback' period is to bring a return for your money.
You normally would not be using the tax values (called Tax Written Down Values)of assets when trying to value a company or business. The values of fixed assets shown in Tax Computations will be the net value after various Capital Allowances have been claimed over the life of the business. Capital Allowances very often bear little or no correlation to the actual devaluation of an asset over time. The level of Capital Allowances claimed by a business will be more closely related by its ability or willingness to pay tax year on year - and the maximum rates of allowances allowed by the Chancellor.
The Balance Sheet Written Down Values of the fixed aasets will probably be more realistic - but even then these will be based on the depreciation policy used by the business - such as the assumptions used in the expected useful lives of the assets and therefore the depreciation rates chosen.
Limited company accounts are required by law to state in the notes to the accounts the rerasoning behind the depreciation rates used so at least a potential buyer can agree or disagree with the valuations shown.
Sole trader accounts do not show such notes.
The Balance Sheet Written Down Values of the fixed aasets will probably be more realistic - but even then these will be based on the depreciation policy used by the business - such as the assumptions used in the expected useful lives of the assets and therefore the depreciation rates chosen.
Limited company accounts are required by law to state in the notes to the accounts the rerasoning behind the depreciation rates used so at least a potential buyer can agree or disagree with the valuations shown.
Sole trader accounts do not show such notes.
>>>>
Something is only worth what someone is willing to pay for it.
All the rest of the valuations are only to convince the buyer of the latter.
<<<
well yes
thats fairly obvious 
but where we are at the moment is the initial feasability stage.
i.e the guys that own it are talking about selling up. we quite like the idea, it fits in with some of our other buinesses, which gives us an opportnity to grow the group.
initially were just looking for a guide to see if its worth progressing any further so ball park calculations are usefull. to see if the figures stack up and wht we could afford as we would need to raise the money to buy it.
whats a feasable loan/ expected return ratio?
keep the info comming
G
Something is only worth what someone is willing to pay for it.
All the rest of the valuations are only to convince the buyer of the latter.
<<<
well yes
thats fairly obvious but where we are at the moment is the initial feasability stage. i.e the guys that own it are talking about selling up. we quite like the idea, it fits in with some of our other buinesses, which gives us an opportnity to grow the group.
initially were just looking for a guide to see if its worth progressing any further so ball park calculations are usefull. to see if the figures stack up and wht we could afford as we would need to raise the money to buy it.
whats a feasable loan/ expected return ratio?
keep the info comming
G
Obtain as many formal sets of accounts as possible showing the trading activity over the past few uears - three at least. If these accounts were completed and signed off by qualified accountants all the better.
Review the accounts or have the accounts reviewed by a professional who understands what the figures show.
If the accounts stack up, then the initial "value" of the business will be the "Net Worth" as shown in the babalnce sheet. However, the owner will ptobably want something more than that but what that "extra" value turns out to be is the main negotitating point.
This can only be arrived at following a thorough interrogation of and discussions with the owner.
Review the accounts or have the accounts reviewed by a professional who understands what the figures show.
If the accounts stack up, then the initial "value" of the business will be the "Net Worth" as shown in the babalnce sheet. However, the owner will ptobably want something more than that but what that "extra" value turns out to be is the main negotitating point.
This can only be arrived at following a thorough interrogation of and discussions with the owner.
Edited by Eric Mc on Thursday 14th December 10:00
Graham said:
>>>>
Something is only worth what someone is willing to pay for it.
All the rest of the valuations are only to convince the buyer of the latter.
<<<
well yes thats fairly obvious but where we are at the moment is the initial feasability stage.
i.e the guys that own it are talking about selling up. we quite like the idea, it fits in with some of our other buinesses, which gives us an opportnity to grow the group.
initially were just looking for a guide to see if its worth progressing any further so ball park calculations are usefull. to see if the figures stack up and wht we could afford as we would need to raise the money to buy it.
whats a feasable loan/ expected return ratio?
keep the info comming
G
Something is only worth what someone is willing to pay for it.
All the rest of the valuations are only to convince the buyer of the latter.
<<<
well yes
thats fairly obvious but where we are at the moment is the initial feasability stage. i.e the guys that own it are talking about selling up. we quite like the idea, it fits in with some of our other buinesses, which gives us an opportnity to grow the group.
initially were just looking for a guide to see if its worth progressing any further so ball park calculations are usefull. to see if the figures stack up and wht we could afford as we would need to raise the money to buy it.
whats a feasable loan/ expected return ratio?
keep the info comming
G
Wasnt meaning to sound smarmy with the quote you copied (!) just trying to point out an important point.
I believe EricMc has it right. The starting point is the value of the assets.
However, in addition to this - and possibly more importantly talking to the owner may help.
The reason I say this is he may be 'thinking of selling' for two reasons. One may be is that he doesnt want the business any more and really wants rid - he is just looking for whatever he can get for it as a retirement fund. The second may be is that he may have got wind that you may be interested and perhaps wasnt really planning on selling but if he gets an offer he cant refuse would consider it.
Obviously both of these situations are on the opposite ends of the scale and he may be somewhere in between - but each scenario has a different amount he would settle on.
If it were me, I would be replying by saying that I would consider it if the price was right, and before you get someone to do valuations ask what kind of figure he had in mind.
That way you can see which of the above two camps he is in. This has the secondary benefit that if he is towards the second camp ie not desperate to sell, trying to make the most money when he gives you this figure it is likely to be a lower , more realistic one as he will think that overvaluing will put you off completely and he will look silly when you come back with a calculated valuation.
Graham said:
Its a retirement fund sale. The company is run my two brothers. they are both looking to retire in the next year or 2
G
What kind of field is it in?
If it is something quite specialist of where the proprietors need to be skilled this limits the potential amount of buyers.
This is where the laws of supply and demand will come into play. The best scenario for you is that they have something they are increasingly desperate to sell, and would snap your hand off if the right price came along - with the knowledge that there are no other buyers at this stage and another may not come along for some time.
On the other hand, there is also the factor of how much you 'want' the business. If you have a group of companies already and this would be part of a vertical expansion plan - ie a distributor purchasing a haulage firm - then above the cost of the business and the potential profits it will make on its own you also have to take into account the benefits it will have for your other businesses. For example if you are a distributor who keeps being shafted by unreliable haulage firms or ones who vary their price on how desperate you are, having the stability of a fixed price when you want it from a firm you also own will save you time, money and hassle.
Conversely, if it is in a separate field which is not linked the other factor is that the time you have spent overseeing the new company may be taken from the others which may lose you some money.
Its all a question of the exact circumstances.
Its an engineering and tuning firm for classic cars.
they have some supension engine and gearbox components they produce, and do some preparation services.
They do a lot of parts business.
My business partner runs a classic car restoration business so its a good fit there, and I'd be looking to expand the parts side with internet sales and well as increasing the race prep side.
Nothing may come from it but its an interesting opportunity to look at. We're not desparate to do it so will only go futher if the numbers stack up in our favour
they have some supension engine and gearbox components they produce, and do some preparation services.
They do a lot of parts business.
My business partner runs a classic car restoration business so its a good fit there, and I'd be looking to expand the parts side with internet sales and well as increasing the race prep side.
Nothing may come from it but its an interesting opportunity to look at. We're not desparate to do it so will only go futher if the numbers stack up in our favour
Graham said:
hobo said:
For a minute I thought you were looking at taking over TVR
<LOL>
that should be easy to value 50p
Are you sure?
No factory, no production staff, no new models ready to go even if you did, and history of very poor sales at a loss due to the way customers have been treated due to reliability problems?
It could be argued you would be better off starting from scratch!
The three things which dictate company value are "risk" (the lower the better), "bidder competition" (the more the better) and "return on investment" (profit). Of the above three things two are subjective (risk and bidder competition) and one is objective (profit).
Looking at the objective (profit) one looks at the adjusted profit, factoring in chucking the owner out and replacing them with someone on a market salary. Let's assume (and you can factor in the "real" figure) that the adjusted net profit comes out at, say, £500k. Multiply this figure by 5-7 (say 6) and the business is worth £3m. Here's the beauty though.
An owner of such a company could never really extrapolate £500k per annum out of the business because of:
Tax (Corp Tax, Inc Tax, NI, Emp NI, Div Tax, etc....) In fact the most they'd get after Tax is about 52%. So £500k becomes about £260k. However, that presumes the vendor takes every last penny out of the business, however that's not possible because the company will need cash to operate and grow, say, £50k per annum, so it comes down to about £210k per annum (back pocket) after you factor in the above.
However, if a vendor sold the company for,say, £3m than they'd (probably) get 75% CGT (Taper) relief. 75% of 40 is 30, so they'd only pay 10% CGT. In effect they'd have £2.7m in their back pocket as opposted to £210k per annum by not selling it - which is the same as 14 years of work. It's what I call "back pocket economics".
Now I'd like to bring it full circle and remind you the above is only based on profit (one of just three issues). As such, a company is worth what anyone's prepared to pay for it. So I've not been much use to you - sorry!!
Looking at the objective (profit) one looks at the adjusted profit, factoring in chucking the owner out and replacing them with someone on a market salary. Let's assume (and you can factor in the "real" figure) that the adjusted net profit comes out at, say, £500k. Multiply this figure by 5-7 (say 6) and the business is worth £3m. Here's the beauty though.
An owner of such a company could never really extrapolate £500k per annum out of the business because of:
Tax (Corp Tax, Inc Tax, NI, Emp NI, Div Tax, etc....) In fact the most they'd get after Tax is about 52%. So £500k becomes about £260k. However, that presumes the vendor takes every last penny out of the business, however that's not possible because the company will need cash to operate and grow, say, £50k per annum, so it comes down to about £210k per annum (back pocket) after you factor in the above.
However, if a vendor sold the company for,say, £3m than they'd (probably) get 75% CGT (Taper) relief. 75% of 40 is 30, so they'd only pay 10% CGT. In effect they'd have £2.7m in their back pocket as opposted to £210k per annum by not selling it - which is the same as 14 years of work. It's what I call "back pocket economics".
Now I'd like to bring it full circle and remind you the above is only based on profit (one of just three issues). As such, a company is worth what anyone's prepared to pay for it. So I've not been much use to you - sorry!!
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