How is a business valued?

[David87M3]

First off sorry if this has bee asked before...

How is a business valued?
Assuming the propery is leasehold, Has say £20K worth of assets and makes £500,000 per year and runns at 12% profit.

Reason im asking is im looking to buy a business and one company I spoke to reckons a value is based on 2-3 years worth of profit assuming there is no property invloved

How true is that?

Thanks

[Mx_Stu]

David87M3 said:

First off sorry if this has bee asked before...

How is a business valued?
Assuming the propery is leasehold, Has say £20K worth of assets and makes £500,000 per year and runns at 12% profit.

Reason im asking is im looking to buy a business and one company I spoke to reckons a value is based on 2-3 years worth of profit assuming there is no property invloved

How true is that?

Thanks

How true? My personal view, Not very.

Far too many factors to list when valuing a business any you have to remember that a professional valuation will only ever be a guide as a business is worth as much as someone is willing to pay for it.

The 2-3 times maintainable earnings is often suggested as a guide but then again what are the maintainable earnings? Are the current management taking market rate salaries? Making excessive pension contributions? Is there personal goodwill attached to the current management?

I would suggest that you look around to find examples of similar types of businesses and see how they were valued?

[TimCrighton]

Different people will naturally attribute a different yield to different businesses, based primarily on a personal assessment of value - some of which might be down to things like how well the existing business is run, extending trading hours etc etc.

You need to consider it against costs, business efficiency, % return etc.

2-3 times is not unusual in something like the leisure industry but you would typically use a dual return method of valuation in this case, using a property related yield to give you seperate value for the bricks and mortar element of the business and an amount for goodwill.

Edited by TimCrighton on Wednesday 6th May 21:30

[StevieBee]

As a starting point:

EBIT x 6 + Unencumbered assets.

But comes down to whatever someone wants / is willing to pay for it.

[PetrolTed]

How quickly do you want to make your money back?

Can you improve the turnover/margins?

Answer those questions and you've worked out what you're prepared to pay for it.

"Worth" is different things to different people.

[srebbe64]

Two things:

1) How much is a buyer willing to pay;
2) How much is a seller willing to take;

If you're a seller make sure you have several bidders. If you're a buyer make sure it's just you that's bidding and, ideally, find a distressed seller who needs to sell for personal reasons.

As a starting point, offer net asset value and see how the seller reacts.

[Eric Mc]

There are no hard and fast rules for valuing. Text books will tell you about all sorts of formulae and techniques. In the end, it is how much the buyer is willing to part with and how much the seller is willing to accept.