What is the business worth?

[TinaBMX]

I've gone back to the drawing board with my business plan and realised the original one was waaaaay too sketchy. Something I'm thinking about now that I didn't before is an exit plan.

I'm wondering how I can work out how much my business would be worth if/when I want to sell it. I'm guessing, in general, the value of a business will be judged on its profit but I guess also things like growth potential may come into play as well as how well processes are organised etc.

At the moment I think there's two ways I could go if my business proves to provide an income over coming years. I could either work in it until I'm ready to retire or I could work on it and sell it earlier on to move onto a new project. Either way, to plan these moves I would need to know how much my business is worth to know WHEN to make the move.

Does anyone know how you can estimate a value for your business? Is there some general equation you can use? Do you compare to the prices of similar businesses that are on the market?

[Norwest Tax]

There are various way of valuing a business:

Profit multiple
Where as the P/E for listed business can be around 10-15, for small business on average it is around 3. This can certainly be less if you are selling a service that is specialised or are not of a recurring nature.

Replacement Value
If there is little goodwill in the business, the most someone will pay is what the stock, P&E.

If you cant make an income out of it, then I dont think it is worth it to do. The chances of a large corporation or even a venture capitalist buying or investing any $ is quite small. (I have seen bad and great ideas bought for millions of dollars, in the hope it will be turned around or being the next big thing). Ask yourself, can you charm and BS your way around professionals, some people can, but most cant.

Originally Posted by TinaBMX

I've gone back to the drawing board with my business plan and realised the original one was waaaaay too sketchy. Something I'm thinking about now that I didn't before is an exit plan.

I'm wondering how I can work out how much my business would be worth if/when I want to sell it. I'm guessing, in general, the value of a business will be judged on its profit but I guess also things like growth potential may come into play as well as how well processes are organised etc.

At the moment I think there's two ways I could go if my business proves to provide an income over coming years. I could either work in it until I'm ready to retire or I could work on it and sell it earlier on to move onto a new project. Either way, to plan these moves I would need to know how much my business is worth to know WHEN to make the move.

Does anyone know how you can estimate a value for your business? Is there some general equation you can use? Do you compare to the prices of similar businesses that are on the market?

[Burgo]

An exit plan is something most soloists dont think about.
When your Young and fit and business is cruising along you feel you can go on for ever.

Actually what we should be doing is developing our business with the idea to sell at a later date. You develop your business with procedures so that if someone else was to walk in tomorrow because you were incapacitated they would be able to follow the procedures and the business would run as if you were running it.

This is a very interesting topic and I could bore you with heeps of information but let see what others think.

[LeelaCosgrove]

I absolutely agree that you should start with the end in mind.

As mentioned above, typical price point on a business is 10 x price earnings. Typical price point on an ONLINE business is 20 x price earnings.

Why the difference?

Online businesses are automated - and the more automated a business (i.e. the less the owner has to do to make sales) the more the business is worth.

So step 1 = automate everything you can ... step 2 = create process maps of everything you do so that a trained monkey could do your job.

And of course, remember this - it doesn't matter WHAT your business is valued at if no one wants to buy it ...

[King]

THE EMPEROR HAS NO CLOTHES

What???

We have been looking at buying a business - the seller has a price in mind, but the three potential buyers, including us, have all be talking 1/6 lower the asking price.

The seller is frustrated - he has had the accountant give him a valuation, plus a chartered accountant, plus a business broker.

Remember the story om the Emperor who what told by his court that the tailor had made him the finest clothing, even though he was naked? He only believed his court, until someone was brave enough to speak up, "but sire, you are naked".

So with any business it is the market that decides the price.

On the subject of multiples, my account says for physical businesses it ranges from 1-5 x profit.

I do not believe the 20x for online - any time I have seen online businesses for sale it has almost always 2x profit ( a typo maybe?)

[Burgo]

Owners of cleaning businesses in Brisbane had an opportunity last week to review their succession planning and update their business planning skills.

Hosted by the Queensland Branch of the Building Service Contractors Association BSCAA, a group of cleaning business owners participated in a seminar titled 'Succession and Secession', presented by Anthony Davis of Brightwater Partnership.

“A key concern for many of our members is how to manage a smooth transition when owners of cleaning enterprises want to sell or retire from the business, while ensuring a positive outcome,” said BSCAA Queensland’s Kathy Lynch, explaining the choice of topic.

Anthony Davis said: “The Australian Bureau of Statistics reports that only 18% of businesses have a documented plan. Furthermore, 20% survive past the first five years in business. An enormous number of small enterprises think they have a great business and believe they don’t need a formal plan. Many others don’t have the knowledge or skills for basic business management or planning”.

Anthony led the group through the options available for business owners achieving their goals when planning to exit business ownership and management roles. Participants were shown and discussed a range of issues that included ownership and control, shareholder and partnership agreements, legal and taxation restructuring, inheritance of office and paths to partnership.
Picture shows: Anthony Davis


T: (02) 6123-4816
E: bscaanat@bscaa.asn.au
W: www.bscaa.asn.au


I thought you might be interested in this article from Cleazine emagazine

[Hugh Thyer]

Two big things that make your business valuable are:
1. Customer list, and
2. Systems for everything you do, from lead generation to making them a client, to billing, follow up sales etc, ongoing relationship management etc.

[KeepitSimpleIT]

Hmmm this is an excellent topic!

I have no major business experience in advising on this topic, so my humble opinion/thoughts are as follows:

I would think that a business would be worth based on the following formula:

Q = How many months (years) can the purchaser guarantee you business profits (clear and identifiable market research)

P = Confirm average profit margin for last 2 years on a PA basis

A = Great business with perfect processes in place, and/or you can do without training - 15%

B = Average business with average processes in place, and/or you can do with some training - 30%

C = Business with little or next to no processes in place, and/or you are not qualified/have zero experience but feel you could have a crack at - 75%

P X Q - (A, B or C) = value of business.

Example:

If an Ice Cream business had profits averaging over 2 years at $58K PA and some marketing research done by both you and the the seller indicated that ice creams will be in fashion at least for the next 2 summers totalling 18 months. You would go $58K x 1.5 years = $87K.

If you think you could do this with only little training, use B for the formula = $61K is the value to you.... (important to note the you bit)

If you have no idea, which we all should by the way, then C be used for the formula = $22K is the value to you.

In summary, the value of the business as put earlier, is what YOU are willing to pay for it, not what an accountant says it is worth. I use the A, B or C values to indicate the reality of the fact of you taking the business over it is nearly 100% of the time going to run less effective with YOU in it for a period of time. Equally I use the Q formula because you should only go with a time frame that can be proven as a given that the service/product will be bought.

Hope that is worth my 2 cents worth.....


Cheers,
Glenn

[King]

Into the mix also needs to come supplier risk (one or more - if one then higher risk because if they fail, so do you), ease of entry of competitors (look what low cost, easy to use desktop publishing programs did to the publishing industry - and even web design). So expensive/specialised equipment could be a plus, rather than a negative.