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O/T: Valuing a Small Business



KZNSeagull

Well-known member
Nov 26, 2007
19,692
Wolsingham, County Durham
Dear wise ones of NSC

I am selling my shop here in SA and have someone interested in buying it, but I need to value it. Having looked on the internet, there seem to be innumerable ways of doing this. I don't particularly want to get business brokers involved as they will want their 10% and selling it to the first person I mentioned it too would be a bonus, so am wondering if there is one usual way of doing a valuation?

The shop makes a reasonable profit (just under 50% of turnover), the building is leased not owned, the assets are the shop fittings, the computer and computer system and other bits and bobs plus stock of course. People used to talk about goodwill, but I think that is old hat nowadays, Am thinking along the lines of fixed assets plus a percentage of profits (dunno what percentage though) plus stock.

Any ideas and advice gratefully received.
 


Moshe Gariani

Well-known member
Mar 10, 2005
12,068
Have you seen Dragons' Den?

Think of a number and add a couple of noughts...
 












rool

Well-known member
Jul 10, 2003
6,031
Cheers, it's a difficult thing to judge. For example you would have stock at cost but would expect slow moving or obsolete items to get written down a bit. I suppose lower of cost or net realisable value covers that. Shop fixtures and fittings can be worth a fraction of what they cost you on the second hand market.

I suppose if I were buying I would be looking at the second hand value of the fixtures and fittings, the potential liability on taking over the lease, or any increases if it is due for renewal any time soon, and the chances of maintaining/increasing business levels.

I would imagine you have a figure in your head that you would like to walk away with after you have settled any liabilities and need to try to negotiate towards that with a deal you are both happy with.
 






LlcoolJ

Mama said knock you out.
Oct 14, 2009
12,982
Sheffield
As you say there are LOADS of different ways of working out a valuation. It basically comes down to the cliche of "it's worth what someone will pay for it".

If I were you I'd work it out based on two or three of the different models (usually involving a multiple of profit + value of assets) and take an average. If this is somewhere near what you'd be happy to accept then at least you have a starting point and something to back up whatever price you quote to the prospective buyer.
 




KZNSeagull

Well-known member
Nov 26, 2007
19,692
Wolsingham, County Durham
Cheers, it's a difficult thing to judge. For example you would have stock at cost but would expect slow moving or obsolete items to get written down a bit. I suppose lower of cost or net realisable value covers that. Shop fixtures and fittings can be worth a fraction of what they cost you on the second hand market.

I suppose if I were buying I would be looking at the second hand value of the fixtures and fittings, the potential liability on taking over the lease, or any increases if it is due for renewal any time soon, and the chances of maintaining/increasing business levels.

I would imagine you have a figure in your head that you would like to walk away with after you have settled any liabilities and need to try to negotiate towards that with a deal you are both happy with.

Thanks. I think that is probably the best way of doing it - I do have a figure in mind. I do not want to overprice it obviously, but it is the "premium" that the buyer is getting by buying a business that is up and running and will make money from day 1, as opposed to a start-up, that is the difficult thing to quantify and justify. My view with regards to them maintaining/increasing business levels is that it is not really my concern - all I can do is hand over all of the business relationships and opportunities that I have built up over the years and it is up to them to do what they want with them.
 




nwgull

Well-known member
Jul 25, 2003
13,653
Manchester
Rule of thumb I've heard is 4x your annual profit + assets. That'd be a really rough estimate though. As with the value of anything: it's what the highest bidder is prepared to pay.
 


KZNSeagull

Well-known member
Nov 26, 2007
19,692
Wolsingham, County Durham
Rule of thumb I've heard is 4x your annual profit + assets. That'd be a really rough estimate though. As with the value of anything: it's what the highest bidder is prepared to pay.

Blimey! The figure I have in mind is much less than that. I am thinking 1 years' profit + assets + stock.
 


Goldstone1976

We Got Calde in!!
Helpful Moderator
NSC Patreon
Apr 30, 2013
13,765
Herts
I've just bought a business at 3.5x historic EBITDA, plus 1x Net Assets. Last one I sold was 12x forward revenue - but that was very fast growing hi-tech. The range in valuation can be huge...
 






Simster

"the man's an arse"
Jul 7, 2003
54,110
Surrey
Blimey! The figure I have in mind is much less than that. I am thinking 1 years' profit + assets + stock.

If you really don't have a clue, you should pay someone who does. No-one likes paying such fees but those services are available for a reason.
 


Paul Reids Sock

Well-known member
Nov 3, 2004
4,458
Paul Reids boot
Blimey! The figure I have in mind is much less than that. I am thinking 1 years' profit + assets + stock.

Might be worth getting some advice.

Unless, you are happy with that money and for the buyer to be getting it at that price. If you think that your idea is fair and aren't the sort of person that will curse themselves for selling it cheap then go for it.

However, I would assume that you could make a lot more than that especially if the annual profit is pretty steady.
 


pastafarian

Well-known member
Sep 4, 2011
11,902
Sussex
Dear wise ones of NSC

I am selling my shop here in SA and have someone interested in buying it, but I need to value it. Having looked on the internet, there seem to be innumerable ways of doing this. I don't particularly want to get business brokers involved as they will want their 10% and selling it to the first person I mentioned it too would be a bonus, so am wondering if there is one usual way of doing a valuation?

The shop makes a reasonable profit (just under 50% of turnover), the building is leased not owned, the assets are the shop fittings, the computer and computer system and other bits and bobs plus stock of course. People used to talk about goodwill, but I think that is old hat nowadays, Am thinking along the lines of fixed assets plus a percentage of profits (dunno what percentage though) plus stock.

Any ideas and advice gratefully received.

you shouldnt discount goodwill out of hand

i think you need to see someone and get some advice,i usually find these (costly) professionals end up saving a huge chunk of change.

look at it this way,if they didnt provide a decent service they wouldnt exist
 




Tight shorts

Active member
Dec 29, 2004
311
Sussex
Looking at it from the opposite side - How would I work out what I was willing to pay for your business?

I would look at recent sets of Accounts to ascertain the turnover and profit
I would look at the trends, ie whether this was increasing, decreasing or fairly flat
I would look at the profit and if the owners wages were not included in deductible expenses I would deduct a comparable wage from that profit to see what the true profit was. I would then look at how much I would be willing to pay upfront in return for that potential profit
I would look at the terms of the lease and think about whether the lease is a good deal or a potential liability round my neck.
I would want to know about the area in which the business is located - is the area crucial to the success or are a lot of sales web based. I would be interested in how other local businesses are doing and whether any planned developments locally would affect the business.
I would think about how much of the trade is linked to the current owner and what they are going to do after selling. Is the goodwill of the business closely linked to the existing owner, ie would sales drop when the owner moves on. Would the owner be willing to stay on for a bit after the sale to ensure transition and customer loyalty (probably in return for a share of future profits)
I would think about the type of business and how future proof it is
I would be interested in whether I could pay in installments or all upfront

If you have some answers prepared for some of these questions it may help in your negotiations. Good luck with it all.
 


Albion in the north

Well-known member
Jul 13, 2012
1,507
Ooop North
Get a couple of valuations. Brokers should do that for free on the chance that you will sell it through them.
You dont need to take their advice or sell it through them but at least you would know the ball park area that you are looking at.
Have had a couple of businesses in UK, % of profit that goes towards price varies with each kind of business.
 



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