Valuing a Business???
Discussion
Just a few quick questions please?
-Whats the ratio used as a general rule of thumb to value a business. (I think its something like X times turnover or profit or something like that.)
-Also, does this work for any business such as a small cafe to a large national chain of businesses.
-If it states 'fixtures, fittings and leasehold interest', would the value of this be on top of ratio above.
Thanx
-Whats the ratio used as a general rule of thumb to value a business. (I think its something like X times turnover or profit or something like that.)
-Also, does this work for any business such as a small cafe to a large national chain of businesses.
-If it states 'fixtures, fittings and leasehold interest', would the value of this be on top of ratio above.
Thanx
Although the factor times profit ratio is a rule of thumb, that is about as accurate as me saying that as a rule of thumb I guess you are male and 35-40.
In this I mean that I may be correct, but for the wrong reasons and a rule of thumb is as exactly as useful as that.
For example, according to some of the banded around rules, on paper I am a millionaire but there is no way realistically that this would be realised from a sale of my business as there are so many factors involved.
The main factor is that something is only worth what someone is willing to pay for it. All the reast is a guideline and a means to an ends. For example if I were selling a business I would do my damndest in the final year to reinvest zero into long term assets and account for things as to show the short term profit in the best way possible. That would probably mean in the first year the new owner would have to spend a hall of a lot more in re-investment and when they are accounting in a more constructive and tax efficient way the profit would certainly be a lot less.
Unless you are taking a blind punt, a lot of research is involved into the running of the company as well as professional advice to check that the profit figures are realistic.
A better rule of thumb is the resale value of the assets as a starting point. On top of that you can factor potential profits and what is reasonable compared to the level of risk in getting those profits - ie if a company has turned over the same amount for the last 5 years, that is reasonably safe... also factor in what is a reasonabe return for your investment. For example, £50,000 profit from an investment of £100,000 is great, but the same level of profit from a business you have just bought for £1,000,000 means that your money would be better in the bank getting interest.
A good start is just to ask the seller what they are hoping to get for the sale. It may that they want a quick sale and a much lower price than expected, which would mean that it is less necassary to spend as much diligence in working out whether it is profitable.
In this I mean that I may be correct, but for the wrong reasons and a rule of thumb is as exactly as useful as that.
For example, according to some of the banded around rules, on paper I am a millionaire but there is no way realistically that this would be realised from a sale of my business as there are so many factors involved.
The main factor is that something is only worth what someone is willing to pay for it. All the reast is a guideline and a means to an ends. For example if I were selling a business I would do my damndest in the final year to reinvest zero into long term assets and account for things as to show the short term profit in the best way possible. That would probably mean in the first year the new owner would have to spend a hall of a lot more in re-investment and when they are accounting in a more constructive and tax efficient way the profit would certainly be a lot less.
Unless you are taking a blind punt, a lot of research is involved into the running of the company as well as professional advice to check that the profit figures are realistic.
A better rule of thumb is the resale value of the assets as a starting point. On top of that you can factor potential profits and what is reasonable compared to the level of risk in getting those profits - ie if a company has turned over the same amount for the last 5 years, that is reasonably safe... also factor in what is a reasonabe return for your investment. For example, £50,000 profit from an investment of £100,000 is great, but the same level of profit from a business you have just bought for £1,000,000 means that your money would be better in the bank getting interest.
A good start is just to ask the seller what they are hoping to get for the sale. It may that they want a quick sale and a much lower price than expected, which would mean that it is less necassary to spend as much diligence in working out whether it is profitable.
Come on guys, he wants a number.
In short...
Turnover is vanity.
Think of anywhere between 4-7 times EBIT (pre-tax profit). You can get up to 20 times EBIT, but you need a very healthy pipeline, low operating costs and a repeatable business annuity, combined with more than 1 hot buyer.
In short...
Turnover is vanity.
Think of anywhere between 4-7 times EBIT (pre-tax profit). You can get up to 20 times EBIT, but you need a very healthy pipeline, low operating costs and a repeatable business annuity, combined with more than 1 hot buyer.
In another thread I wrote:
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!!
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!!
Thanx for the help everyone!!! 
Say if a business has already been trading for a while and has a turnover of £5k to £6k per week, with fixtures and fittings valued at about £40k. If its lease is offered at £180k...
-Then-
What would a business be valued at, relatively, if its fixtures and fittings were valued at £20k but it is not currently trading so has no customer base, but has the potential to acheive similar turnover with a similar profit margin.
Just for the record, I'm 21 and at university but have been looking to go into business for over a year. I've just not had the best luck in finding and acquiring the right property. Its got to the point where I'm seriously considering taking a loan out since my budget is holding me back.
Thanx again for the advice.
Say if a business has already been trading for a while and has a turnover of £5k to £6k per week, with fixtures and fittings valued at about £40k. If its lease is offered at £180k...
-Then-
What would a business be valued at, relatively, if its fixtures and fittings were valued at £20k but it is not currently trading so has no customer base, but has the potential to acheive similar turnover with a similar profit margin.
Just for the record, I'm 21 and at university but have been looking to go into business for over a year. I've just not had the best luck in finding and acquiring the right property. Its got to the point where I'm seriously considering taking a loan out since my budget is holding me back.
Thanx again for the advice.
itstony said:
Thanx for the help everyone!!!
Say if a business has already been trading for a while and has a turnover of £5k to £6k per week, with fixtures and fittings valued at about £40k. If its lease is offered at £180k...
-Then-
What would a business be valued at, relatively, if its fixtures and fittings were valued at £20k but it is not currently trading so has no customer base, but has the potential to acheive similar turnover with a similar profit margin.
Just for the record, I'm 21 and at university but have been looking to go into business for over a year. I've just not had the best luck in finding and acquiring the right property. Its got to the point where I'm seriously considering taking a loan out since my budget is holding me back.
Thanx again for the advice.
Say if a business has already been trading for a while and has a turnover of £5k to £6k per week, with fixtures and fittings valued at about £40k. If its lease is offered at £180k...
-Then-
What would a business be valued at, relatively, if its fixtures and fittings were valued at £20k but it is not currently trading so has no customer base, but has the potential to acheive similar turnover with a similar profit margin.
Just for the record, I'm 21 and at university but have been looking to go into business for over a year. I've just not had the best luck in finding and acquiring the right property. Its got to the point where I'm seriously considering taking a loan out since my budget is holding me back.
Thanx again for the advice.
Be aware that if you are looking for business finance, then unless you have a large amount of capital to put in yourself, or a house to act as security it is highly unlikely to get a loan. I have been there, and bought the T-shirt with all of the major banks. Even when my business made a profit of about £70,000 in the first year, I had to personally secure all business borrowing my first year out of uni.
To get even a ballpark figure of a potential value, a lot more information is needed. For example, although the potential may be £5000 per week at a £1000 per week gross margin, thats not so great if you have to pay 4 staff, and it took a year to get that turnover leaving you £50,000 down in the meantime.
itstony said:
Thanx for the help everyone!!!
Say if a business has already been trading for a while and has a turnover of £5k to £6k per week, with fixtures and fittings valued at about £40k. If its lease is offered at £180k...
-Then-
What would a business be valued at, relatively, if its fixtures and fittings were valued at £20k but it is not currently trading so has no customer base, but has the potential to acheive similar turnover with a similar profit margin.
Just for the record, I'm 21 and at university but have been looking to go into business for over a year. I've just not had the best luck in finding and acquiring the right property. Its got to the point where I'm seriously considering taking a loan out since my budget is holding me back.
Thanx again for the advice.
Say if a business has already been trading for a while and has a turnover of £5k to £6k per week, with fixtures and fittings valued at about £40k. If its lease is offered at £180k...
-Then-
What would a business be valued at, relatively, if its fixtures and fittings were valued at £20k but it is not currently trading so has no customer base, but has the potential to acheive similar turnover with a similar profit margin.
Just for the record, I'm 21 and at university but have been looking to go into business for over a year. I've just not had the best luck in finding and acquiring the right property. Its got to the point where I'm seriously considering taking a loan out since my budget is holding me back.
Thanx again for the advice.
There's just not enough information there to make take an objective view. If you want to email me some specifics through my profile then I'll try and be more helpful. What I'd like to know is 'past' and (projected) 'future':
Pre-tax profit
Assets less liabilities (net assets)
Gross profit percentage
Cost of overheads
Secondly, as mentioned previously it's worth what anyone's prepared to pay for it (I sell about fifty comanies per year).
My understanding is that the ratio will vary according to norms within different industries, but it is generally a multiple of EBIT (regardless of turnover).
This is normally a starting point, but of course as is normal for our Capitalist Society, anything for sale is only worth what some-one else is prepared to pay for it.
This is normally a starting point, but of course as is normal for our Capitalist Society, anything for sale is only worth what some-one else is prepared to pay for it.
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